WHEN PEOPLE Looking back at Joe Biden’s presidency, they might, depending on the events of the next few months, conclude that one of his most important economic achievements has been to reverse a decades-long global boom in tax evasion. companies. His administration’s call for an end to the “race to the bottom” has reignited multilateral talks on rewriting international rules that encourage multinationals to channel vast profits into tax havens. Two months after this call, America and other wealthy countries agreed on a roadmap for reform. The deal paves the way for the biggest corporate tax overhaul in a century.
Mr Biden’s motives are not pure: he is motivated less by principle than by a desire to leverage more of U.S. companies to fund his post-pandemic spending priorities. Nevertheless, the G7 country proposals, which their finance ministers approved on June 5, are welcome. The international tax system rests on a foundation laid in the 1920s. For much of the next century, policymakers’ concern was to avoid double taxation, not to reduce abuse. The result has been a steady increase in avoidance, further fueled by the growth of tech companies and intangibles, to the point that 40% of multinational profits overseas are shifted to havens. the OECD estimates it costs the treasury up to $ 240 billion a year – a tiny fraction of global economic output, but still a lot of unbuilt hospitals and unrepaired roads.
Past attempts to plug this hole have been fragmentary. the G7 wants a more comprehensive fix. He supported a minimum overall corporate tax rate of at least 15%, combined with a reallocation of taxing rights to give more to countries where companies have sales. Rishi Sunak, British Chancellor, who chaired the G7 talks, called its “seismic” deal.
In fact, it is only a first step. Reaching a global deal means finding terms that 132 other countries, including China and India, can agree to. Poor countries fear a clash with rich countries: the G7 could reap more than 60% of the earnings gains from a minimum tax. Some havens will resist, including Ireland, which jealously guards its corporate tax rate of 12.5% and has a veto on tax matters in the EU.
If these obstacles can be overcome, reforms will still have to be enacted. Many members of the US Congress fear that they will hurt the competitiveness of their businesses. European countries want America to move first. America wants France, Britain and other countries that have introduced “digital service taxes,” targeting sales of Silicon Valley companies, to remove them immediately. Agreeing to put them on hold would help advance the delicate diplomacy. The European levies have prompted retaliatory tariffs from the United States, which are currently suspended. the OECD estimates that a tax-induced trade war would wipe out more than 1% of the global reduction GDP.
Expectations must also be tempered as to how much of the revenue lost due to avoidance will be recovered. Most would come from minimum tax. But a 15% floor would only increase global corporate tax revenues by 2.7%. The $ 50 billion to $ 80 billion that the combined reforms could bring in is meager next to the $ 6 billion in global annual profits of multinationals. The profit reallocation part of the proposals looks like a lot of work for little gain. Countries where an as yet undefined group of multinationals make sales would share the rights to tax on at least 20% of the global profits made by those companies above a 10% margin. The net gain from this tedious exercise may not exceed $ 10 billion.
Nevertheless, a Rubicon has been crossed. The tenor of the tax debate started to change after the global financial crisis and has now fundamentally changed. Governments around the world agree that corporate tax arbitrage has gotten out of hand and that tax rights need to be better aligned with economic activity. Twenty years ago, the champions of tax competition had the upper hand. Today, the dominant line of thought is that fiscal sovereignty goes both ways: countries have the right to set their own rates, but those undermined by low-tax jurisdictions also have the right to stop the tax. looting. By the end of the year, the majority of the world’s governments may have agreed on changes that could wipe out zero-tax havens business models in the Caribbean.
Any deal emerging from the global talks would be far from perfect. This would only make it possible to raise modest sums compared to the holes in the budgets induced by the covid. This would reduce, but not end, the use of loopholes; corporate tax departments are too smart for that. It is likely to give more to advanced economies than to developing economies, meaning there will be pressure to review the deal. But it promises to reveal a path to a more rational and fair tax system, suited to an economy based on things you type on a keyboard rather than dropping your foot. This is the destination negotiators must keep in mind in the coming tax months. ■
This article appeared in the Leaders section of the paper edition under the title “Une nouvelle architecture”