NEW YORK CITY: The Jul 1 agreement by 131 countries to found a planetary minimum taxation complaint of astatine slightest 15 per cent for multinational corporations (MNCs) and reallocate taxing rights is simply a measurement forward.
But the woody arsenic it stands represents different missed accidental to present an equitable result for processing countries.
It is bully that multilateral efforts to betterment planetary taxation are backmost successful favour. This is mostly due to the fact that US President Joe Biden’s medication wants to extremity the contention to the bottommost successful firm taxation rates – a contention that has benefitted lone taxation havens.
In astir cases, little taxation rates not lone failed to pull caller concern to countries, but besides deprived governments of the funds they request for societal objectives and infrastructure improvements.
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But the caller taxation woody reflects the imbalances successful planetary powerfulness relations. G7 countries enactment the statement they reached past period to the 139 countries that are portion of the OECD/G20 Inclusive Framework connected Base Erosion and Profit Shifting.
Faced with a take-it-or-leave-it choice, astir processing countries agreed, contempt important reservations.
But a fistful – including Nigeria, Kenya, and Sri Lanka – did not motion up. And adjacent immoderate of those who did made it wide that the negotiations were not over.
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PROPOSED TAX RATE TOO LOW
Several important issues remain. The archetypal is that the projected minimum taxation complaint of 15 per cent is excessively debased to deter profit-shifting by MNCs.
This reflects respective developed countries’ penchant to support their ain planetary firms alternatively than travel the pb of the United States and Argentina, which had called for a minimum taxation complaint of 21 per cent, and of galore African countries, which projected a 20 per cent rate.
And for astir countries successful Latin America oregon Africa, which had mean firm taxation rates of 26 per cent and 27 per cent, respectively, successful 2020, a planetary minimum complaint of astir 15 per cent would bash small to trim incentives for profit-shifting.
Several countries whitethorn frankincense unilaterally follow a higher minimum rate.
TAX REVENUES WON’T GO TO ‘SOURCE’ COUNTRIES
Furthermore, nether the connection agreed astatine the OECD, astir of the further taxation revenues volition spell to MNCs’ location countries, not to the alleged “source” countries wherever these companies bash concern and make profits.
A fig of processing economies privation root countries to person precedence successful applying the minimum tax, peculiarly to MNCs’ involvement earnings, royalties, work payments and superior gains. The existent woody would let them to use the minimum taxation lone to interest, royalties, and a acceptable of payments yet to beryllium defined.
The magnitude of gross the minimum taxation generates volition beryllium connected the rate. This is captious for processing countries.
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A caller survey by the EU Tax Observatory shows that with a 15 per cent taxation rate, Mexico, South Africa, and Brazil basal to summation an further €500 cardinal (US$592 million), €600 million, and €900 million, respectively, of further firm income taxation revenues successful 2021, compared to €900 million, €2 billion, and €3.4 billion, respectively, with a 21 per cent levy.
The 25 per cent minimum complaint advocated by the Independent Commission for the Reform of International Corporate Taxation would output an other €1.3 cardinal for Mexico, €3 cardinal for South Africa, and €7.4 cardinal for Brazil.
The OECD statement besides introduces a look to allocate MNCs’ planetary profits for taxation purposes. But it would use lone to firms with yearly planetary turnover exceeding €20 cardinal and nett margins of astatine slightest 10 per cent of revenue.
Moreover, lone 20 to 30 per cent of their alleged “residual” nett supra that threshold would beryllium taxable to taxation successful the countries wherever it is generated. This caller regularisation whitethorn truthful make little than US$10 cardinal of further gross globally per year.
Developing countries’ main request passim has been for a meaningful reallocation of taxing rights to root countries. The G-24, the large grouping of processing economies successful the talks, has called for 30 to 50 per cent of residual profits to beryllium reallocated, portion the African Tax Administration Forum (ATAF) is present asking for astatine slightest 35 per cent.
A simpler solution would beryllium to allocate MNCs’ planetary profits among countries by a look based connected cardinal profit-generating factors specified arsenic employment, sales, assets, and assets use. But erstwhile demands by some the G-24 and the ATAF to apportion a percent of each profits, whether regular oregon residual, to root countries person been rejected.
NOT THE END OF THE ROAD YET
Another occupation is that signatories to the OECD statement are being asked to region unilateral measures specified arsenic integer services taxes. Many processing economies are not blessed astir rescinding these levies, oregon astir limiting their options to taxation integer MNCs successful the future.
The last interest is the request that processing countries judge mandatory arbitration of disputes.
Many person historically regarded this arsenic an infringement connected their nationalist sovereignty. They besides constituent to nontransparent outcomes and prohibitive costs, and the information that astir arbitrators travel from developed countries.
But the Jul 1 announcement is not the extremity of the road. Although the G20 is apt to endorse the connection this week, negotiations volition continue, with a last statement expected successful October.
To alteration the outcome, processing countries indispensable present propulsion for a higher planetary minimum taxation complaint and a bigger reallocation of taxing rights, and garbage mandatory arbitration.
The combat for a fairer planetary taxation strategy volition proceed beyond this existent process, possibly successful a much inclusive forum, arsenic the United Nations Panel connected International Financial Accountability, Transparency and Integrity has precocious argued.
The coming months volition beryllium captious to ensuring that the last woody does not simply bespeak affluent economies’ interests, but alternatively generates important other revenues for each countries, including those that request them the most.
Jose Antonio Ocampo, a erstwhile concern curate of Colombia and United Nations under-secretary general, is simply a prof astatine Columbia University and Chair of the Independent Commission for the Reform of International Corporate Taxation. Tommaso Faccio is Lecturer successful Accounting astatine Nottingham University Business School and Head of the Secretariat of the Independent Commission for the Reform of International Corporate Taxation.