On October 8, 2021, 136 countries agreed upon a deal with the Organization for Economic Co-operation and Development (OECD) to enact a global corporate tax, which has been considered by experts and world leaders alike to be a significant breakthrough in the elimination of tax havens.
Members in confirmation included the U.S., China, the European Union, and all other G20 countries. Although the deal has previously been attempted and discussed many times over, the proposal gained traction under President Joe Biden’s tenure and was successfully passed with the newfound support of a few former opponents, namely Ireland, Estonia, and Hungary. Despite this progress, Nigeria, Sri Lanka, Pakistan, and Kenya have continued to withhold support. Now, the next step is for economic advisers representing the G20 economic powers to officially support the blanket policy at a financiers’ meeting in Washington D.C. on October 13. If the deal goes through, it would then be passed onto the G20 leaders to formally confirm during a conference at the end of the month.
This deal is, simply put, an assault on tax havens for megacorporations, or as classified in the official OECD statement, Multinational Entities (MNEs). The OECD/G20 framework, referred to as the Inclusive Framework (IF), curtails the profits of global corporations in two prongs.
The first and more problematic “pillar” is a broad levy on the profits of MNEs with total sales over 20 billion Euros and profitability over 10% (before tax/revenue). It mandates that 25% of a company’s profit in excess of 10% of its total revenue must be evenly allocated as tax revenue to any member states where the corporation has consumers. Not only is this amount likely to be small and insufficient for states already struggling to balance a budget, it also comes with a catch. States who agreed to the deal must abolish all existing forms of digital service taxes, which according to CNBC, “would be unlikely to recoup the revenue they may lose from existing digital service taxes.”
The second and more noteworthy “pillar” is the 15% minimum corporate tax for all MNEs that meet the 750 million Euro profit threshold. This rule, as outlined by the OECD, would be strictly enforced on all IF members. Non-complying nations with corporate taxes under the minimum 15% corporate tax rate would be mandated to pay other developing IF members the difference between their actual tax and the minimum 15% rate. That is to say, if Ireland kept its corporate tax at the status quo of 12.5%, it would be due to pay back the remaining 2.5% of missing tax revenue generated by all its corporations profiting over the threshold to IF members.
Again, this deal comes with another drawback. A “substance carve-out” mentioned in the OECD statement would allow corporations to pay a reduced tax in regions where they employ a substantial amount of workers or have many tangible production assets, like factories and machines. This is patently a loophole to the already somewhat lenient 15% minimum threshold and simply allows MNEs to bypass corporate tax laws by restructuring production lines and aspects of their manufacturing process.
On balance, while the global corporate tax deal has generated a lot of positive feedback, it appears that resistance to the proposed policies is not uncommon. Domestically, it is essential that Treasury Secretary Janet Yellen negotiates Congress’s support, as the U.S.’s commitment to the new guidelines will determine the success this deal will have on a global scale. According to Rebecca Christie, a visiting fellow at a Brussels-based Bruegel economic think tank, “The U.S. decision to commit to the global minimum tax was absolutely essential to reviving the OECD talks.”
Internationally, concerns have been raised about the feasibility of implementation, as the official OECD statement pushes for a timeline of implementation by 2023 for both “pillars.” Additionally, a rushed concession added a ten year implementation period for countries to formally implement the 15% minimum tax rate and for corporations to adjust to the policy, effectively leaving the deal with “no teeth,” as stated by Oxfam. Finally, others have even expressed their concerns about the leniency of the policy, as some, like Yellen, believe the 15% minimum tax rate is simply too low to be effective, but was necessary to attract the support of states such as Ireland.
While the new corporate tax deal has made relative leaps and bounds to restrict the formation of tax havens, its policies are far from failsafe, may cause some losses in tax revenue for certain states, and are not close to a consensus on what is a reasonable and effective corporate tax rate. Before total tax havens for megacorporations can be eliminated, more work must be done.
