Earlier this month, US president Joe Biden proposed a comprehensive and global tax reform that could significantly impact international economics. The aim is to set up a global agreement on the minimum tax rate and limit the big corporations’ ability to shift profits to low-tax jurisdictions, starting a much-needed rethink about how we think about taxes in the 21st century. Re-Imagine Europa has long held that our tax system was not created for the digital, global and mobile world we live in today and needs to be rethought. How can Europe contribute to this rethinking?
For several years, large international companies have benefited from the inadequacy and incompleteness of international taxation legislation. Taking advantage of the services of the best tax consultants and lawyers, they have exploited the shortcomings of global regulation and the race to the bottom in tax rates that some countries have put in place.
All of this could soon be over: among many policy innovations that President Biden’s administration is proposing, the Minimum Corporate Tax is the one that could have the most significant impact outside the United States. Although the proposal outlines are still blurred and there are many details to be defined, with the world’s largest economy on board and warm signals coming from both Germany and France, the agreement on global tax reform seems more likely than ever.
The proposal is closely intertwined with the US plans to raise corporate taxes at home, partially reversing the 2017 tax reform law that lowered the rate from 35% to 21%. The rationale is to avoid tax revenues leaking from the US to countries offering more favourable tax rates: according to official stats issued by our partner OECD (which is closely cooperating with US administration on the topic), the race to attract big corporations to competing jurisdictions has made the average statutory corporate tax rates drop significantly in the last 20 years.
President Biden’s plan would force companies to pay taxes where they earn revenues, preventing the shift of profits to tax havens while establishing a global minimum tax rate, agreed by the world’s biggest economies. Almost certainly, the proposal will meet the most substantial resistance within the United States since US corporations are the most important beneficiaries of the “grey zones” that characterise the status quo.
In the last decade, big corporations have developed complicated webs of companies to shift profits out of major markets, where most of their revenues are generated, and into low-tax jurisdictions like Ireland and some Caribbean countries. This scheme allows major digital companies to enjoy average tax rates, calculated over tax paid across all jurisdictions a firm operates in, dropping below 15%. According to recent research, a total of over $240 billion in tax revenues are lost each year to corporate tax abuse by multinational organizations.
The plan promoted by Washington stimulated cautiously favourable reactions from European governments as it could bring to a significant rewrite of the global corporate tax regime. Frustration for the lack of progress in negotiations has spurred several countries to launch unilateral digital services taxes to respond to the tax avoidance policy adopted by the large multinationals, with the commitment to revoke them should a global agreement be reached.
While negotiations are still in their infancy, a proposal coming from the US could stimulate other important economic actors such as France, Germany and the UK to sign it, significantly increasing chances of success for the initiative. A crucial point still in discussion is the rate at which such a global minimum tax should be issued. A lower rate could make the proposal less effective, although it would probably make it easier to gather consensus around it.
The taxation system is critical in shaping the whole economy and is vital to solving many different issues, from employment to investment and research. Most fiscal systems in Europe today were created in the early 20th century when the economy looked very different, not least because national governments had the independence needed to define and impose their perspectives. Therefore, according to Re-Imagine Europa’s Advisory Board recommendations, our team is building a Task Force to develop proposals for “A new, more equitable fiscal system for the 21st century“.
Considering the current socio-economic crisis, time could be ripe for both public and private stakeholders to agree on the need to steadily increase the large companies’ contribution to the general welfare, prioritising people’s health and livelihoods over the desire of those bent on not paying taxes. The European Union should make wise use of this opportunity to think creatively on the issue and develop innovative solutions that could be acceptable by most European countries.