The pros, cons, and ugliness of the global tax reform agreement
Let us not be too stingy: protocol The reform of international corporate taxation by 130 countries is an important moment. It is not common to reach a global consensus on something with such specific consequences.
However, despite the orderly congratulations, the results were mixed at best. This is the good, bad and ugly part of reform.
First, good. This transaction solves the most serious problem of international profit tax. These are due to the taxation rights following the principle of the residence of the corporate entity. This may make sense when the added value comes from the production of physical goods. On the contrary, when value exists in intangible services and intellectual property, it will lead to abuse.For example, it is estimated that 40% of foreign direct “investment” in the world is Structure to reduce taxes Not for actual business investment reasons.
This invitation to play with the system not only means that the taxes paid by multinational companies are also lower than the legislators expected. If the government is not worried that these companies will transfer their profits to other places, the government will also set the tax rate lower.
The transaction addresses this issue by introducing a minimum global profit tax rate of 15% and transferring a portion of the taxation power of that profit from the place of residence to the place of sale.
Economists who have studied these numbers have found that, if not earth-shattering, it makes a major difference. A forthcoming report by EconPol researchers Michael Devereux and Martin Simmler estimates that taxation rights on $87 billion of profits will be redirected to the country of sale. The French Official Economic Analysis Committee (CAE) set this figure at 130 billion U.S. dollars. Calculated at a typical tax rate, this is equivalent to an annual tax value of US$2-30 billion.
Minimum tax, CAE discovery, Can increase corporate tax revenues in France, Germany, and the United States by 6 billion to 15 billion euros, respectively.
The result is different from the previous focus on large technology companies. The political momentum comes from European countries, who are outraged by the ridiculous taxes paid by the US Internet industry, despite the huge revenues that their markets generate. When they unilaterally pass a sales-based digital service tax, they provide political impetus for global negotiations.
But economically speaking, it doesn’t make sense to choose digital services alone. The miracle of intellectual property accounting allows multinational companies to profit from very tangible goods and services, from coffee to taxis. Therefore, including all the largest multinational corporations, the US needs are improvements to earlier plans.
It’s a bad thing now. The agreement only solves this problem very partially. Too few multinational companies are included. Even with a minimum tax rate, most corporate profits will still be taxed based on the residency principle. Therefore, the exceptions it generates will also be retained. The modest minimum tax rate leaves an incentive to shift profits to lower tax jurisdictions (so there is no reason to complain). This deal will not get rid of the poor performance of tight-belted governments and large tax-evading companies-once politicians begin to seek solutions to record public deficits.
And special Peel off Banks and natural resource companies. This may be reasonable for the latter; it makes sense to levy taxes on them where they mine hydrocarbons and minerals. For banks, the excuse is that they are regulated and taxed in the markets they serve. But if this is true, they will not be affected by the redistribution of taxation rights. In fact, they have a lot of losses: Devere and Simler found that if there is no bank divestiture, the redistributed tax base will be twice the original.
Finally, ugly. The government missed the opportunity to simplify the rules, leaving fertile ground for new and ingenious technologies to circumvent their intentions. Leaders could have bargained over the relative weights of investment, employment, and sales in the global profit distribution of multinational companies based entirely on formulas, rather than bargaining.
Over time, the threshold can be lowered and the scope of exemptions can be reduced. But if this deal is used to rule out any future changes, it’s not. The United States requires other countries to abolish unilateral digital taxes after the new regulations take effect. This is reasonable only if it does not hinder the review of the framework.
This welcome process must not stop here. This is a huge leap for politicians. However, this is still only the first step for the global economy.