Why global rate setting projects are too complicated and require a new approach
MILAN – In 2021, the world’s richest countries announced their intention to agree and apply a minimum corporate tax rate. The idea was to solve the problem of large corporations generating huge revenues but paying very little tax from the public purse.
But the Organization for Economic Co-operation and Development (OECD) recently admitted that this groundbreaking international agreement will in fact not be implemented in 2023, as had been hoped. Mathias Cormann, Secretary General of the OECD, spoke of “difficult discussions” over the “historic and very important” idea.
Perhaps, then, such an ambitious plan requires a different approach. Because one of the reasons for the lack of progress is that the OECD is trying to reach an overly inclusive consensus (more than 130 countries) with an overly complicated agenda.
The original idea was quite simple. The United States had proposed a “global minimum tax” agreement in which individual countries tax companies based in those countries on their global profits.
The motive was to ensure that multinationals are taxed in at least one country (the one in which they are based), forming a kind of global defensive alliance against “profit shifting”, when companies transfer their profits from jurisdictions high-tax jurisdictions to low-tax jurisdictions. diets.
Such an arrangement, where a minimum tax rate (say 15%) on global profits is internationally agreed, would mean that each country would participate in a cooperative framework. Not so much a complex systemic international mechanism as an agreed alignment, where each state is responsible for taxing its own multinationals. So far, so simple.
But the OECD has complicated things, introducing complex arrangements that can still jeopardize the establishment of any international pact. And he seeks the agreement of too many countries.
This means that nothing has changed yet and currently there is no indication that a global minimum corporate tax rate will become a reality. This was not a priority at the recent G7 summit in Germany, where the invasion of Ukraine was understandably the top priority.
But the OECD’s ambitious path does not mean that the original idea should be abandoned. It is still possible for any country to adopt the global minimum tax standard and begin to form a “defensive alliance” against tax competition and profit shifting.
A broad and overly inclusive multilateral approach is not absolutely necessary. Instead, this is clearly an opportunity for “minilateralism” – when a smaller group of committed countries acting together could be extremely effective.
Simply put, minilateral agreements are a form of cooperation that avoids some of the problems posed by agreements that are stymied by a desire to be too inclusive.
Their effectiveness lies in the fact that they require the inclusion of the smallest possible number of countries necessary to have the greatest possible impact on solving a problem.
They have been used in areas like environmental policy, where some countries have decided their own targets when it comes to things like carbon emissions.
In the case of the taxation of multinationals, minilateralism would allow cooperation between countries that sincerely believe in politics. The smaller number of participants would make agreement on specific measures much more likely and also pave the way for more countries to join later.
Most EU countries are still in favor of an agreed tax rate, but last month Hungary raised objections that blocked progress among the 27 member states. Meanwhile, the United States, which initially took the lead on the project, faced opposition from the start.
Add to that the economic impact of the war in Ukraine, soaring inflation and the crisis in the cost of living, and everything seems much more complicated. Forging an international agreement on a tax rate when so many other compelling issues are at stake seems unlikely, certainly in the short term. In the longer term, a minilateral approach may be the only way forward.
Carlo Garbarino is Professor of Taxation and Director of the Tax and Accounting Observatory at Bocconi University in Milan, Italy. This article originally appeared on The Conversation (UK).