It would be churlish to deny that the OECD-led agreement to tackle multinational companies’ systematic avoidance of tax was a step in the right direction. But the wholehearted backing of the richest countries and largest corporations suggests it is unlikely to be overly onerous or to materially redistribute revenue more equitably.
Since the 1990s, the OECD has been working on proposals to counter the ability of the world’s most profitable companies to shift profits to low tax jurisdictions, often through spuriously recognising intellectual property in third countries. The emergence of digital titans such as Amazon and Facebook made the problem even more acute. At the very least, it is a symbolic breakthrough.
The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) was agreed in July by 132 countries, representing 90% of global GDP. The final details are expected to be signed in October, with implementation set for 2023. Professional services firm Deloitte describes the timetable as “ambitious and challenging” and “considerably earlier than expected”.
The G20 finance ministers’ joint statement claimed a “historic agreement on a more stable and fairer international tax architecture”. Others were less generous. Oxfam International head Gabriela Bucher described it as “no more than a G7 money grab”, noting that G7 and EU countries’ treasuries were set to receive more than two thirds of the new revenue.
Pillars of wisdom
Pillar one of the framework aims to redistribute tax revenue more equitably by more accurately recognising where profits are generated. The OECD estimates that this will result in profits of $100bn being reallocated annually.
Pillar two will establish a global minimum corporate tax rate of 15%, generating $150bn in additional tax returns. By comparison, the Tax Justice Network estimates that OECD countries and their dependents facilitate 68% of the global $427bn worth of tax avoided each year.
Technology giants and other multinationals have historically opposed similar avoidance-tackling initiatives – but this time many of the most egregious practitioners have lined up in support.
Rather than being a breakthrough in stakeholder capitalism, this enthusiasm has more to do with heading off moves from countries such as UK and France that had voiced support for unilateral digital services taxes. With action inevitable, unified OECD proposals are preferable to a complicated web of national rules.
Indeed, a “key component” for pillar one’s implementation is for it to be “coordinated with the removal of unilateral digital services taxes and relevant similar measures”, notes a Deloitte briefing paper.
For pillar two, the minimum tax proposal cannot be considered onerous. The OECD average corporate rate is 21.5%; the only OECD countries with rates below 15% are Ireland (12.5%), Hungary (9%) and Switzerland (8.5%). In any case, the ideological tide has turned with post-pandemic rate rises planned in the US and UK.
The main motivation behind the agreement was the challenge presented by digital firms and proliferation of tax havens. But the Overton Window of acceptable policies has also shifted, with tax justice gaining momentum. “Even the supporters of right-wing parties are angry about big companies not paying their fair share,” notes Simon MacAdam, senior global economist at consultancy Capital Economics.
The new agreement required consensus, made possible by the austerity following the financial crisis, across the political spectrum and around the world. Relinquishing a degree of tax sovereignty has been one of the most contentious issues. It also required the US to offer a grand bargain; in short, to offer redistributive tax rights in exchange for others setting a global minimum.
Despite the global breadth of agreement, there remains a real possibility it will not come to fruition. It has been a political football for decades and requires solid US leadership. OECD work dating back to 1998 lacked the support of the Bush administration and it was only after the financial crisis that austerity-hit G20 leaders were sufficiently motivated.
The Obama administration later effectively ‘closed the book’ on reform when it became clear US technology firms would be the main target. It was the Trump administration’s Global Intangible Low Tax Income (GILTI) reform that established the tax on offshore revenues.
President Biden will need legislation approved by a partisan and divided Congress. A slightly surreal situation may arise where multinational corporations need to lobby Republican politicians to increase their own tax liability.
The US will inevitably be the biggest winner, as it is the home jurisdiction of the vast majority of internationally fleet-footed tech giants. However, the OECD estimates that countries of all income levels will benefit, albeit developing countries’ treasuries by just 1%.
“Is this going to be transformational in terms of generating tax revenues, bolstering the idea of stakeholder capitalism and taxing companies fairly and then using the money to invest in welfare states and ending poverty? The answer is no, it’s not a big deal,” says MacAdam.
The numbers are indeed very small in the global context. Only around 10% of tax revenues are from corporate profits, of which half are collected from multinationals, and indirect taxes including VAT on international companies can be three times larger than corporation tax.
The “overwhelming academic consensus” is that just 5% of profits are shifted to minimise tax, mainly because the costs associated with avoidance are only economic for the largest companies, according to MacAdam.
He says: “Even if we eliminated the problem of profit shifting entirely, we’re talking about saving 5% of 5%, which is 0.25% of global tax revenue… Even if the whole thing comes to fruition and is implemented, it’s not transformational at all.”
He adds a more effective approach would be to tighten national tax codes. “The real problem is giving companies loopholes to make it look like they’re not earning any profit,” he adds.
Devil in the detail
While the final details are yet to be thrashed out, the danger is that accounting rules for items such as interest deductibility or asset depreciation could be manipulated to put companies just outside of the scope of the OECD framework, which is limited by turnover and profitability. It may also just mean that competition shifts to other spheres, as countries innovate new ways of providing sweetheart deals.
Another potential issue is that, while unable to escape the overall 15%, loose rules may provide flexibility for where taxes are paid. If an advantage can be gained, financially or perhaps through influence, an industry to exploit loopholes is sure to pop up.
There are also a handful of holdouts, including the usual-suspect tax havens and the EU states of Ireland – which has long used low rates to attract foreign companies – Hungary and Estonia. The developing nations of Kenya and Nigeria have also not agreed, but this is likely more a protest at the disappointingly low boost to their national coffers than a negotiating tactic.
“If an advantage can be gained, financially or perhaps through influence, an industry to exploit loopholes is sure to pop up.”
However, the impact of holdouts is limited by the design of the proposals. A sub-15% corporation tax would be offset one-for-one by taxes further up the multinational company’s structure rendering no overall gain. The Biden administration has also made it clear to holdouts that this is a key policy priority.
The OECD agreement is a seminal one, even if many are left disappointed. It shows a willingness to respond to popular dissatisfaction, on what was only recently seen as an intractable issue. Countries are drawing a line in the sand for the lengths they will go to accommodate big business. And it creates a framework that can be revisited, perhaps one day to the 25% corporate rate advocated by Oxfam’s Bucher.
It shows international cooperation is possible on sensitive global issues such as the sharing of tax sovereignty. This spirit of international cooperation bodes well for tackling the even more substantive issue of climate change at COP-26 in November.