At the time of writing, 130 countries have backed a global minimum corporate tax rate of 15% – designed to discourage multinational corporations from purposefully redistributing profits and thus manipulating their tax returns in the process. The aim is to increase tax revenues, by taxing corporations regardless of where their sales are made.
However, the idea is not a new one, with the European Union Member states in 1992 proposing a similar idea, albeit on a smaller scale. The said proposal was suggested by the Ruling Committee – a European Commission Expert panel, which was led by Onno Ruling. Their suggestion of a 30% minimum corporate tax rate however never came to fruition.
The Trump administration in 2017 also floated with going after lost tax revenue to tax-havens, describing of how the Global Intangible Low-Taxed Income rate was only 10.5% that calendar year – half the US corporate rate following the passage of Trump’s signature tax legislation (The Tax Cuts and Jobs Act).
In 2019, the OECD again began to suggest a global corporate tax rate. This was followed by both France and Germany publishing a joint proposal – Pillar Two, with the intention of stopping the ‘race to the bottom’ in global corporate tax rates.
Janet Yellen, former chair of the Federal Reserve now US Treasury Secretary, agreed with the Pillar Two proposal to tackling tax avoidance in April 2019.
As corporate taxation is largely based on the residence of these firms, the movement of funds from the country of sale to so-called ‘investment’ into nations with favourable tax conditions inevitably follows. Estimates have been made that around 40% of global foreign investment – worth $15 billion altogether, “passes through empty corporate shells,” according to the IMF; structured purely for lower tax purposes. The global minimum corporate tax reform aims to minimise this, by shifting the tax burden to where the sale was made – as a pose to the place of residence.
Developing nations will undoubtedly suffer from global tax reforms. Lower corporate tax rates incentivise investment, that otherwise would’ve gone to the already wealthier nations. Examples of this would include Ireland, which has seen extraordinary economic growth – outpacing many of its European neighbours over the past decades. This first started in the 1980s, with the introduction of a 10% corporate tax rate for manufacturing firms, alongside a 10% rate for financial services introduced in 1987. This was followed by a gradual reduction in the headline corporate tax rate between 1996-2003, from 32% to 12.5%. What followed was much greater investment in Ireland. In fact, at the beginning of the 1990s, the average Irish person made 65% of the average EU salary; by 2005, this number reached 135% of the average EU salary. Such remarkable growth continued following the Great Recession of 2008, with Ireland having the highest GDP per capita in the EU, in 2014. Following the global minimum corporate tax reforms, fewer nations will be able to follow in Ireland’s footsteps by using corporate tax rates as a means to attract investment – as incentives for multinational corporations to invest in developing economies are reduced.
In addition to this, increased taxation only takes away money from corporations, who would otherwise use these funds to stimulate growth in the economy – by means of innovation, factoring building, hiring etc. These investments by corporations, leading to economic growth, creates tax revenue by means of consumption alongside reducing welfare costs due to greater rates of employment.
Finally the failure to simplify the overly complicated tax rules, only make the discovery of more ways of avoiding taxation inevitable, given the sheer number of lawyers and accountants exploiting any perceived ambiguity in the tax code, rendering the global corporate tax experiment futile.