A global corporate tax rate: will it help or hinder developing nations’ Covid-19 recovery?

– US President Joe Biden has joined a campaign to stop tax evasion

– The OECD is moving to establish a minimum global corporate tax rate

– Concerns have been expressed that the plan will harm emerging economies

– The UN Tax Committee has developed a parallel measure for digital tax

During last year’s US presidential campaign, Joe Biden promised to crack down on tax-evading multinationals, and he has now called for a global minimum corporate tax rate. However, some fear that President Biden’s plan may hinder developing economies’ Covid-19 recovery.  

In April, as part of his Made in America tax plan, President Biden announced proposals to oblige multinationals – foremost among them tech giants such as Google, Amazon, Facebook and Apple – to pay more tax, both in the US and in other countries where they generate profits.

Such companies currently employ a range of techniques to minimise their tax bills.

One such technique is profit-shifting. This involves profits being declared, not in the countries where they are accrued, but in countries with low corporate tax rates, such as Ireland, or tax havens such as Bermuda, the Cayman Islands or Singapore.

To accompany the plan’s announcement, the US Department of the Treasury released documents demonstrating that “more US profits are housed in tiny tax havens than in the major economies of China, India, Japan, France, Canada and Germany combined”.

The Biden administration’s plan seeks to establish a global minimum corporate tax rate of 21%.   

It is hoped that this would eliminate incentives to offshore investment and stop the so-called race to the bottom, where countries compete for multinationals’ business by reducing corporate tax rates.

This intervention has reinvigorated an ongoing debate. For the last four years the OECD has been coordinating talks among 140 countries regarding the establishment of a global tax rate.

Speaking at a conference last month, the OECD’s director for tax policy, Pascal Saint-Amans, said that negotiations were now “‘too big to fail”, and that a deal was likely to come this year.

Mixed responses

The OECD’s plan has been met with widespread support from many richer nations.

For example, the UK – which launched its own Digital Services Tax last year – has said it “strongly supports G7, G20 and OECD discussions on long-term reform” and is “committed to dis-applying the Digital Services Tax once an appropriate international solution is in place”.

Neighbouring Ireland, however, stands to lose out if a global minimal rate is introduced.

For some years Ireland has courted multinationals with its 12.5% corporate tax rate – compared to 19% in the UK, 30% in Germany and 26.5% in Canada.

Many big tech firms have established bases in the country as a result, and Irish authorities are concerned that a change in the rate could prompt an exodus.

Speaking in April, Ireland’s minister of finance, Paschal Donohoe, said he believed that smaller countries “need to be able to use tax policy as a legitimate lever to compensate for the real, material and persistent advantage enjoyed by larger countries”.

Others have expressed similar sentiments.

For example, the Financial Times recently reported that many developing economies fear that the eventual OECD agreement will not be in their best interests.

“[T]he world’s poorest countries are once again at risk of losing out when the global tax pie gets divided, despite the fact that they are more in need of tax income than anyone else,” Tove Maria Ryding, policy and advocacy manager at the European Network on Debt and Development, told the publication.

This question has become particularly relevant in the post-pandemic context.

While countries are searching for tax revenue to support them as they rebuild, many developing nations are racing to diversify their economies away from an over-reliance on tourism or, in some cases, hydrocarbons.

Many are also focused on a green recovery from Covid-19, for which foreign direct investment is also key. A competitive corporate tax rate is one way to attract multinational companies, which could help to underwrite such efforts. 

Rival UN proposal

In parallel to the OECD-led initiative, the UN Tax Committee has been developing a similar programme, which is focused specifically on digital companies.

The UN’s stance is more flexible than the OECD’s, and has been welcomed by many developing nations.

In April the committee voted to include a provision – known as Article 12B – in the UN’s 2021 Model Tax Convention, which grants additional taxation rights to countries where digital services are provided and revenue is generated.

While the article is non-binding, where implemented it will enable developing economies to capture more value from tech giants’ operations in their countries.

Article 12B was championed by India and Argentina, and backed by various emerging nations, among them Ecuador, Ghana, Nigeria and Vietnam.

The UN’s stance demonstrates the growing consensus around addressing global tax avoidance with the economic needs of developing nations in mind, particularly at a time when tax revenue has a crucial role to play in recovery.