G7 agrees to a global corporate minimum tax – but developing countries don’t appear to have much to gain
June 10th, 2021
June 10th, 2021
Amid great fanfare last weekend, the G7 finance ministers agreed to propose a global minimum corporate tax of at least 15 percent, presented as a landmark decision to end tax avoidance by multinational companies and to help all countries raise funds to fight the Covid-19 pandemic.
But is this as good news as it sounds? Unfortunately not.
Debate about the global corporate minimum tax is ultimately a political discussion: How much do particular countries want to tax multinational companies, and which country or jurisdiction should this revenue be attributed to? With a low 15-percent global corporate minimum tax rate—as well as the agreement that such a minimum rate would only apply to companies whose profit threshold is above 10 percent—the G7 leaders meeting this Friday in Cornwall clearly seek to retain more revenue for themselves, and limit the scope of the proposed revenue-sharing to the 100 largest multinational companies.
This would mean that we might not see any additional revenue from retail-based digital companies, such as the U.S. tech giants. For instance, in the first quarter of 2021 Amazon’s U.S.-based parent company posted a profit margin of 6.6 percent. Also, some of the largest global companies in the Standard and Poor´s 500 Index show profit margins of 12.7 percent, leaving the door open for these companies to slightly modify their margins—and opening the way for future tax abuse schemes.
Most importantly, the 15-percent rate agreed by the G7 is too low—well below the UN Financial Accountability, Transparency and Integrity (FACTI) Panel recommendation made earlier this year, which called for a 20- to 30-percent global corporate tax on profits. ICRICT, as a global tax expert group, has called for a 25-percent global minimum tax to be applied.
The EU Tax Observatory estimated recently that a global minimum corporate tax rate of 15 percent could only raise an additional $59 billion for EU countries and $50 billion for the United States per year. For selected developing countries, we find that Brazil ($1.1 billion), India ($0.6 billion), and South Africa ($0.7 billion) would gain very little at this rate.
However, if the global corporate minimum tax rate is raised to 25 percent, this could be a potential game-changer. At this rate the EU would get $203 billion, with the U.S. ($201 billion), Brazil ($9 billion), India ($1.83 billion), and South Africa ($3.65 billion).
Those revenue levels for India, for instance, would be significant, and would be even more than its own digital services tax revenue. India’s Equalisation Levy on digital services, such as advertising, raised $204 million in revenue in 2020-2021. But India would under the G7 proposal would need to forego this revenue, with the U.S. threatening trade sanctions on India if it keeps its Equalisation Levy.
Another flaw in the G7 proposal is that countries with corporate headquarters tend to gain more. According to estimates from the authors of the proposed Minimum Effective Tax Rate (METR) proposal, if a global corporate minimum corporate tax ended at 25 percent—and if the new revenues had a more equitable distribution —we could see Brazil gaining $18.1 billion, India gaining $21.9 billion, and South Africa gaining $6.05 billion.
It is probably good to say that all estimates of revenue gains should be taken with a pinch of salt, as much depends on the scope of companies in this global minimum tax proposal, distribution of untaxed profits between countries, and any additional carve-outs, among other things. The timetable proposed by the OECD would see a decision in the Inclusive Framework by the end of 2021, with implementation taking place only at the beginning of 2023.
There is lots at stake to agree on a minimum global corporate tax rate that will benefit all countries, not just those in the Global North. In 2021, as many as 163 million people are expected to be pushed into extreme poverty due to the pandemic. Social protection policies by some developing countries were enacted in 2020 to reduce the impact on poverty and inequality, but these have been largely underfunded and, making matters worse, the available money often failed to reach those most in need.
The FTC’s recent People’s Recovery Covid-19 Tracker found that 63 percent of funds in 8 of 9 surveyed developing countries—including South Africa, Kenya, Bangladesh, and El Salvador—went to big companies, as opposed to social protection and support for informal workers.
Reaching an ambitious and fair global tax deal will not only eliminate the current loopholes in the international financial system, but also encourage developing countries to end their grossly unfair tax holidays on foreign investors.
Unfortunately, despite the G7 agreement, it is still not clear whether the global minimum corporate tax that still needs to be ironed out will represent a real game-changer for developing countries. They are the ones most impacted by the Covid-19 pandemic, and urgently need to raise enough funds to protect their citizens and acquire vaccines.
A proposal was made on May 17 by a larger group of developing countries called the G24, which includes South Africa, India, Mexico, and Nigeria, with much less fanfare than the G7 agreement. This proposal, which would be much fairer to the Global South, called for more multinational companies to be taxed at the minimum threshold, and for taxes to take into account the location of companies’ activities, as opposed to where they are headquartered—which tends to be in countries in the Global North.
Unfortunately, it seems that the developed nations are still far from treating developing countries as equal negotiation partners, and are not really listening to them. The ball now moves to the G20, where the finance ministers’ meeting in Venice in July will be the first test to see how countries from both groupings are starting to merge their proposals—and how far G7 countries are willing to shift their proposal.
Real progress on tackling corporate tax loopholes, however, will ultimately depend on getting more countries to the negotiating table. And clearly, low-income countries also need to be listened to. These negotiations should take place within the United Nations framework, preferably during the UN General Assembly in September, where the discussion on global corporate minimum tax should be linked directly to the realisation of the Sustainable Development Goals (SDGs), and where the interests of those countries most affected by the pandemic should be put first.
Indeed, these are precisely the developing countries that are not members of the G7 or the G20, and which do not tend to have many multinational company headquarters in their territories. And it is precisely those countries whose voices—despite the G7’s claims of being inclusive—are still not being heard.