The Big Deal of the Global Minimum Tax

Twenty years into the widespread transformation of the Fourth Industrial Revolution, regulators across a range of sectors are catching up with the ways in which the internet has enabled an array of financial behaviours to exist in a cyber-limbo between what is wrong and what is illegal. The determination to close that gap includes the proposed global minimum tax supported by Canada.

The G20 finance and central bankers meeting in Venice. History in the making on minimum corporate tax rate/G20 Secretariat photo

Kevin Page with Sylvan Lutz and Michael MacLennan

July 9, 2021

People reading financial news in recent days were likely surprised to learn that the international community has coalesced around an approach to establish a global minimum tax for large multinational digital companies. Is it a big deal? It needs to be.

On July 5, following years of work led by the Organisation for Economic Cooperation and Development (OECD), 130 countries — including Canada — and jurisdictions representing more than 90 percent of global GDP, signed on to a two-pillar plan to “reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate”.

Expect more news in the coming days and months. Tax is on the agenda at the July 9-10 meeting of G20 finance ministers and central bankers in Venice, Italy. The global community — the OECD/G20 Inclusive Framework Group on Base Erosion and Profit Shifting — have targeted October to complete technical work and develop an implementation plan. Ratification is planned for 2022. Implementation in 2023.

Is the plan significant? Yes.

Many people remember the words of the first man on the moon. Neil Armstrong said “That’s one small step for a man. One giant leap for mankind.” People are hoping for a leap on the taxation of multinational companies. This is more like an important first step on the way to a giant leap.

Countries have been struggling for many years with how to tax large digital companies like Amazon and Facebook, who do business around the world but seek out low tax environments in which to record profits for taxation purposes.

This is the result of a global race to the bottom for corporate tax rates which has eaten away at government revenues in developing countries and shifted the tax burden from corporations to labour and land in the rich world. Economists including Thomas Piketty, author of Capital in the Twenty-First Century, argue that this has resulted in growing global inequality since the 1980s, which has increased political polarization and destabilized democracies.

Countries have been struggling for many years with how to tax large digital companies like Amazon and Facebook, who do business around the world but seek out low tax environments in which to record profits for taxation purposes.  

The growing tax gap from base erosion (fewer entities paying decreasing taxes) and profit shifting (to low tax countries) has hurt the balance sheets of governments in need of revenues to pay for pandemic supports and new policies to address climate change and income disparity. The barrage of news reports about large companies recording enormous profits during (and before) the pandemic while paying little tax has undermined the sense of fairness in the balance of taxation between business and labour and created this new consensus around minimum taxes.

To start to address these major issues, Pillar One of the OECD’s plan requires the largest multinational corporations to pay taxes in jurisdictions where revenues are generated, not only where they have a physical presence — this could relocate up to $100 billion USD annually in tax revenue to the jurisdictions in which profits are made.

Pillar One deals with the size of multinational companies to be included; the definition of the tax base; and eligible revenue to be distributed across jurisdictions. The current plan is limited to large (more than $20 billion USD annual turnover to be adjusted downward over time) and successful companies (more than 10 percent profitability).

Pillar Two deals with the calculation of a minimum tax rate (at least 15 percent). It is complicated. The details cover domestic and treaty-based rules for income inclusion and source taxation; carve-outs and exclusions; linkages with other minimum tax jurisdictions and much more. It would allow parent nations to charge the difference between the tax rate that a corporation headquartered in their jurisdiction paid in a tax haven and the global minimum rate. This is expected to raise large amounts of revenues (OECD estimates $150 billion USD at the 15 percent minimum) for countries with lots of large multinational corporations, particularly the US.

These reforms will provide governments in the developed and developing world with higher revenues. The importance of this cannot be overstated as humanity seeks to recover from COVID-19 and transform the energy system to mitigate the increasing devastation caused by the climate crisis.

Global problems require global solutions. Without framework, a growing list of countries (more than 25) including Canada are moving forward with digital services taxes destined to add complexity to the global tax environment, and this piecemeal approach is not desirable for anyone. Even some large multinational companies looking for additional certainty and integration on taxation believe it will support their global operations.

And yet, despite widespread support, the path ahead for the plan is fragile.

The details of Pillars One and Two will face significant scrutiny in the months ahead. The nine countries that did not sign the OECD’s proposal were the low-tax EU members Ireland, Estonia and Hungary as well as Peru, Barbados, Saint Vincent and the Grenadines, Sri Lanka, Nigeria and Kenya. Their low-tax economic strategies will be made nearly impossible by the OECD’s proposal.

While the US was a key player in promoting the agreement, US Treasury Secretary Janet Yellen has already expressed concern that the minimum tax rate should be raised. There is a real issue as to whether President Joe Biden will have sufficient support in the Senate. Some Republican Senators have portrayed Pillar One as an international tax grab on US companies.

Economists will also debate the potential differential revenue impacts on low versus high income countries. Others have raised concerns about a reduction of foreign direct investment in low-income countries in a post- pandemic recovery if they are not able to undercut rich countries on their tax levels. Many low-income economies rely more heavily on corporate income taxes. However, it seems likely that with a 15 percent or even 21 percent minimum, developing countries could still slightly undercut the corporate tax rates of developed nations to provide a responsible competitive edge.

Public policy thought leaders, many of whom have encouraged the OECD efforts, will make the case that the agreement does not go far enough. For this group, the global tax challenge is bigger than large digital companies and the minimum tax rate proposal of 15 percent is too low to address the ongoing tax burden shift away from business to labour. In a $90 trillion plus global economy, the amount of revenues to be reshuffled and taxed is in the $100s of billions. It is not pocket change, but not enough to turn the ship on global policy challenges.

Here, the words of the British newspaper The Guardian, after the signing of the Paris Accord seem applicable: “By comparison to what it could have been, it’s a miracle. By comparison to what it should have been, it’s a disaster.”

Next steps on global tax reform will not get easier. In the years ahead, global leaders will have little choice but to better coordinate and integrate our tax and trade systems to address climate change. It is important that these current reforms are as well designed and collaborative as possible as they may lay the foundation of global cooperation for decades to come. There are few bigger deals than building the foundation for a more just, transparent and efficient world order — and the first step is happening right before our eyes.

Contributing writer Kevin Page is President and CEO of the Institute of Fiscal Studies and Democracy at the University of Ottawa. He was previously Canada’s first Parliamentary Budget Officer.

Sylvan Lutz is a Master of Science candidate in Environmental Management at Peking University and in Environmental Economics and Climate Change at the London School of Economics.

Michael MacLennan is an undergraduate student at the Telfer School of Management at the University of Ottawa