Who are the winners and losers of the global corporate tax agreement?

G20 finance ministers meeting in Italy have agreed on a reform of the taxation of multinational companies which aims to prevent nations from using ultra-low tax rates to attract companies.

The world’s major economies would be the biggest winners from the preliminary deal brokered by the Organization for Economic Co-operation and Development, while tax havens would be the biggest losers.

The United States, Germany, France and many of the world’s largest economies are where multinationals do most of their business, but are increasingly less likely to have their tax base.

These countries should benefit from a measure that would redistribute part of the corporate taxes collected to the countries where the multinationals actually make their profits.

Imposing a minimum rate of 15 per cent (with less scope for lowering it) would also increase the amount of tax to be apportioned.

Learn more about the Global Corporate Tax Agreement

According to the OECD, which conducted negotiations that resulted in a draft agreement on tax reform between 131 countries, setting a minimum effective tax rate of 15% would generate $150 billion in additional revenue per year. year.

Many countries have rates above 15% on paper, but with so many exemptions that companies end up paying much less. Most of these exemptions would be closed, so companies would end up having to pay at least 15%.

The CAE, a body responsible for providing economic analysis to the French government, calculated that Paris would likely receive an additional 6 billion euros ($7.1 billion) in tax revenue per year.

Germany would probably receive 8.3 billion euros and the United States around 18 billion dollars.

China would also benefit as it should be able to continue to offer some tax incentives to support business development.

However, for every winner, there are also losers, including countries that have set low tax rates as an incentive for businesses to locate in their countries. Tax havens that charge little or no tax lose the most.

While Barbados and St. Vincent and the Grenadines balked at the deal, other tax havens like Panama, Bermuda and the British Virgin Islands signed on nonetheless.

“They realized they didn’t have the ability to block an international deal and calculated it was in their interest to be cooperative,” said Nicolas Veron, an economist at the Peterson Institute for International Economics in Washington and D.C. the Bruegel Institute. in Brussels.

“Countries that have been attracting front companies for years will suffer from the reform and will have to find other development strategies,” said Farid Toubal, professor of economics at Paris-Dauphine University.

European countries like Ireland, which have lured Apple and Google to establish European bases with the possibility of reducing effective tax rates to virtually nothing, would have a windfall of revenue if they joined the reform.

But that is only if these companies stay and continue to make their profits there.

Countries like the Netherlands, Luxembourg and Switzerland are in a similar boat.

“Beyond the impact on public finances, it is clear that the reform process could affect the economies and employment of these countries, especially if multinationals relocate profits and investments accordingly,” said economist Ricardo Amaro of Oxford Economics.

In 2018, about a third of the profits of American multinationals were made in the Netherlands, Ireland and Luxembourg, although these countries accounted for only 5% of their sales, Mr Amaro said.

But Ireland, which has invested heavily in IT infrastructure and education in recent years, and which has become a center for the pharmaceutical industry, would likely retain many multinationals even if it increased its rate.

“Of course, the screen companies will leave but the production base will remain because Ireland has other assets. They speak English, it’s part of the huge European market, etc,” said Mr. Toubal.

Non-governmental groups, such as Oxfam, which analyze tax avoidance strategies used by multinationals, have criticized the OECD-brokered deal for letting rich countries keep the bulk of the extra tax revenue.

“The world’s poorest countries will recover less than 3% – despite being home to more than a third of the world’s population,” said Gabriela Bucher, executive director of Oxfam International.

But the draft agreement that emerged in early July contains some sweeteners for emerging countries.

They will benefit from measures that redistribute part of the tax revenue to the countries where the profits are generated.

Developing countries will also be able to maintain certain tax incentives to attract manufacturing industry, although the details have yet to be agreed.

Updated: July 11, 2021, 07:17

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Luisa D. Fuller