Is today a turning point against corporate tax abuse?
This is an extended version of the op-ed recently published in the Guardian.
The G7 countries have the chance to strike the biggest blow in a century against the tax abuse of multinational companies. Top line agreement this today would allow the OECD to deliver a full deal over the coming months on a global minimum corporate tax rate, setting a permanent floor under the damaging race to the bottom – and delivering hundreds of billions of dollars in tax revenues to supercharge the pandemic response and recovery. But the current proposals would deliver those revenues in such a manifestly unfair way, that they may also sound the death knell for the rich countries’ continuing privilege in setting rules for the world.
How we got here
To understand the significance of the moment, consider the historical context. In the 1920s and 1930s, the League of Nations choose a path for the taxation of multinationals which has persisted to the present day. But multinationals themselves have exploded in number and complexity since then, and tax abuse has in recent decades become a central part of their approach.
Where once multinationals were a more efficient organisational form for cross-border economic activity, now much of their advantages stem from being able to pay lower tax than domestic competitors. This is achieved by exploiting the archaic basis of tax rules in order to shift their profits away from the places they make their money, and into jurisdictions like the Netherlands or Cayman which offer effective tax rates at or near zero.
Only 5% of the global profits of US multinationals were shifted like this in the early 1990s. But over the next twenty years, that exploded to 30% and kept rising, with an estimated $1.4 trillion of profit shifted by the largest multinationals in the most recent high-quality data available (shamefully, this is OECD data for 2016). That’s nearly 2% of world GDP that year, and not far off sub-Saharan Africa’s total GDP.
The UK with its dependent territories is the biggest single actor, responsible for nearly a third of corporate tax abuse worldwide. Quite the qualification to be G7 chair at this crucial moment – but an opportunity for some redemption also.
TUMI: The corporate tax justice agenda
Since the Tax Justice Network was established in 2003, we have advocated for four key elements of corporate tax justice: transparency, unitary taxation, a minimum tax rate, and a globally inclusive body to set the rules fairly. We might give this the acronym TUMI (transparency, unitary, minimum, inclusion) – a term translating as ‘knife’ in the Quechua language of the Andean region.
Transparency in this case means public country by country reporting by multinationals, to reveal the extent of profit shifting. Our approach was adopted by the OECD in 2015, at the behest of the G20 group of countries, but only for private information to tax authorities. The limited data that is made publicly available, in aggregate form and heavily delayed, are nonetheless a breakthrough in the transparency of these multinational corporations, the world’s biggest economic actors. The EU is now agreeing to make data public at the company level, a huge step forward. While lobbying has led to major weaknesses in the EU approach, others can and will now go further – the taboo has been broken.
Unitary taxation is based on the recognition that multinationals maximise profits at the global level, not in any one subsidiary – so they should be taxed on that global profit. This works by apportioning the profit to the countries where the real activity takes place (employment and sales), so that all get a fair share. This was an option in the current reform process, back in early 2019, but sadly will only apply for now to a very small element of the profits of a small number of multinationals. If delivered fully, unitary taxation with formulary apportionment makes profit shifting largely impossible.
Minimum effect tax rates, meanwhile, make profit shifting unattractive. If tax advisers know that the effective tax rate will be topped up to the minimum, regardless of whether they can shift their profits into a low or no tax jurisdiction, the incentive for abuse is largely removed. For these jurisdictions too, the point of offering low rates is also gone – since this just means that some other country will collect the revenue they give up.
Inclusion, finally, means that the rule-setting body itself matters. The League of Nations was the forerunner to the United Nations, allowing a forum for negotiation between countries. But in practice the League was the club of the imperial powers, and in that sense its genuine successor is the Organisation for Economic Cooperation and Development. The OECD, the club of rich countries, gradually took over the setting of international tax rules from the 1960s, as the United Nations saw a period of lower income countries seeking to discipline multinational companies from operating extractively and with impunity in their territories – a process that gave rise to early demands for a what came to be known as country by country reporting.
The UN is intended to provide a broadly democratic and transparent forum for all countries of the world, at whatever level of per capita income, to negotiate and be heard. And despite the active resistance of OECD countries, the vastly underfunded UN tax committee has beaten the OECD to the punch with a technically robust treaty article offering a new approach to taxing digital companies.
Meanwhile, last year saw the intergovernmental discussions under the UN Secretary-General’s initiative on financing for development during the pandemic give rise to a recommendation for a UN tax convention, which would provide the basis for negotiating tax rules under UN auspices rather than the OECD. And in February this year, the high-level FACTI panel made that a central recommendation of its final report.
The FACTI Panel report, recently highlighted in a report from the World Economic Forum, provides a near-comprehensive platform of corporate tax justice and wider reforms – including each element of TUMI. The Secretary-General António Guterres may well recommend negotiations begin on a UN tax convention to pursue this agenda at the start of the new General Assembly cycle in September – perhaps when bringing forward his planned policy brief on illicit financial flows, at the High-Level Policy Forum.
The G7 decision
Within the current OECD process, dominated by the G7, the greatest potential for progress lies with the proposal for a minimum tax rate. While profit shifting would remain possible, undertaxed profits would have the tax “topped up” to the minimum rate. If set at 21%, as the Biden administration proposed earlier this year, we estimate that the additional revenues worldwide would exceed $500 billion. Even at 15%, as now seems the likely starting point for agreement, the gains are substantial.
But the distribution of those additional revenues is crucial. The OECD proposal privileges the headquarters countries of multinationals, which are typically the richest countries. The G7 countries – Canada, France, Germany, Italy, Japan, the UK and US – make up 45% of global GDP, although just 10% of the world’s population. Under the OECD proposal, they stand to gain more than 60% of the additional revenues. Lower income countries lose a higher share of their tax revenues to corporate tax abuse but would gain disproportionately little from a minimum tax enacted on this basis.
Our alternative proposal is the METR, or Minimum Effective Tax Rate. This would take the same undertaxed profit but apportion it simply to the countries where the multinationals’ real economic activity takes place – with no discrimination between headquarters and host countries. Allowing that profit to be taxed at the statutory rates in place would see higher additional revenues overall, and the distribution would be much fairer globally.
With a 21% rate, the METR would raise some $640 billion, compared to $540 billion in the OECD approach. With a 15% rate, the METR would raise around $460 billion, versus $275 billion in the OECD approach.
The differences are dramatic, and especially so at the lower 15% rate. India could gain $4bn under the OECD proposal; but more than three times that amount, nearly $13bn, from the METR. China could gain $32bn under the OECD proposal; but more than twice that, $72bn from the METR. For Brazil, the difference is $10 billion versus $3 billion. For South Africa, $3.5 billion versus $1.5 billion… The G7 countries themselves would each do substantially better under the METR at 15%, with an overall increase in revenues of $250 billion rather than $170 billion.
The sheer size of the potential revenue gains reflects the extent to which the largest multinationals have been able – and aggressively willing – to exploit the archaic nature of the OECD’s current tax rules. The monopoly power of Amazon and others owes a great deal to the unlevel playing field faced by smaller, tax-compliant competitors.
But the scale of revenues also offers the opportunity for a transformational shift in responses to the pandemic. The UK has cut its aid budget at the time of greatest global need, crying poverty. The G7 are still arguing over whether or how much to fund international vaccination efforts. Delivering the minimum tax rate in a fairer way would more than cover the costs of COVAX, and more importantly in the long term would also provide a major boost to lower income countries’ sovereign ability to fund their own public health systems.
It should never again be in the power of these few rich countries to decide whether the rest of the world is able to claw back revenues from the biggest tax abusers. In September, the UN Secretary-General Antonio Guterres can signal the start of negotiations on a UN tax convention which would create a globally inclusive, intergovernmental body to set tax rules in future. For now, the G7 should use their unequal power to deliver the fairest possible outcome. We’ll all be better off if they do.