To get 130 jurisdictions to agree is remarkable. But plenty remains to be done
FOUR WEEKS ago the finance ministers of the G7 countries, meeting in London, trumpeted that they had sealed a “historic” and “global” deal to reform the taxation of multinational companies and thus to curb tax avoidance. In fact, that was just the precursor to an agreement struck on July 1st, after fraught negotiations in the virtual realm involving 130 jurisdictions. Though the talks were held under the auspices of the OECD, an economic club of mainly rich countries, the deal has been agreed to by rich and poor alike.
Officials signed up to a five-page statement with two main elements: a new minimum tax rate on multinationals’ profits; and a reallocation of the right to tax those of the largest, away from places where they register their assets and towards where they make their sales. In return for those new tax rights, governments would refrain from some unilateral measures, notably taxes on giant technology companies. Securing agreement from so many countries on such a touchy issue is a remarkable feat. Even so, there is more work to do before the future of corporate taxation is settled.
For years negotiators have been trying to close the gap between the places where multinationals do business and where they book profits. As the global economy has digitised, the gap has widened—for example, as firms have registered intangible assets in tax havens and reported profits there. A study published by the IMF in 2018 found that a decrease of a percentage point in a country’s corporate-tax rate raised pre-tax profit reported there by 1.5%. The effect has increased over time. In the chase for these flighty profits, tax rates have been slashed.
Now governments have had enough. The proposed minimum tax of at least 15% would reduce companies’ incentives to game the system, by reducing the gains from siphoning away profits to havens. The reallocation of taxing rights should also reduce companies’ power to play with their tax base. The location of customers is harder to manipulate than that of intangible assets like brands or algorithms.
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