The global minimum corporation tax

Happy New Year from New Economy Brief.

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The year has picked up where 2023 left off in UK politics, with endless speculation and debate around possible future tax cuts ahead of the general election. But beyond this debate, some significant tax changes are being made that go largely unnoticed in mainstream UK political discourse, but could mean big changes for tax policy across the world. These are the efforts to crack down on ‘profit shifting’ by large muti-national companies, which lets them report profits in countries with lower corporation tax rates than the ones they predominantly operate in, and so pay as little tax as possible.

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Since the start of 2024, there is a new global minimum corporate tax rate of 15%. This week, New Economy Brief explores how this tax came about, its possible effects, and its limitations. We also ask what more could be done to ensure global companies pay their fair share of tax.

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The global minimum corporation tax. 

On January 1st 2024, a ‘critical mass’ of developed countries introduced a global minimum corporate tax rate of 15%. This follows three years of negotiations at the OECD to close loopholes in the international tax system, and many years more of campaigning from civil society groups to combat profit shifting through global tax havens. The first wave of jurisdictions implementing the new minimum tax in January includes the EU and UK, along with several countries widely regarded as enablers of global tax abuse, such as Ireland, Luxembourg, the Netherlands, Switzerland and Barbados.

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What is profit shifting? Over the past thirty years, there has been a race to the bottom in corporation tax rates around the world, undermining countries’ ability to raise revenue. Every year, governments lose nearly a third of a trillion dollars in corporate tax revenue to tax havens, as companies channel their earnings through countries with minimal levels of tax.  For instance, Tax Justice UK have set out how Amazon’s main UK division pays no corporation tax in the UK, despite making hundreds of millions of pounds in profits, because it declares its revenue in Luxembourg with a lower tax rate. The UK is closely associated with this practice, as four of the top ten leading tax havens are in our overseas territories. Tax Justice Network calculated that the world loses the equivalent of a nurse’s yearly salary to a tax haven every second.

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The rich world’s solution to curtail tax havens. 

Through negotiations at the OECD, nearly 140 countries representing over 90% of the global corporate tax base agreed to a deal with two ‘pillars’: (1) allowing countries to tax multinationals based on their sales in that country, and not on their registered profits, which can easily be shifted to lower tax jurisdictions; and (2) an effective global minimum corporation tax of 15% for multinational companies with turnover higher than €750m. This means multinationals paying less tax than this in a particular country would face a “top up” tax in their home country, reducing the incentive and ability to shift profits to a tax haven. 

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Predicted effects. The OECD estimates it will increase annual tax revenues by 9%, or $220bn worldwide. The EU Commissioner for the Economy, Paolo Gentiloni said 2024 will herald the end of a race to the bottom in corporate tax rates, but other tax experts such as PwC US’s Will Morris say it could encourage more competition between governments to offer generous subsidies, tax breaks and credits to attract businesses to their countries, like those seen in the US Inflation Reduction Act. 

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The influence of tax havens and corporate lobbyists.

The Biden administration propelled the negotiations earlier on, advocating for a higher minimum of 21%. Alliance Sud’s Dominik Gross explains how low tax jurisdictions such as Switzerland, Ireland and Luxembourg “actively negotiated” the minimum rate down to 15%. (Research by Demos found that tax directors at large businesses with UK operations supported 21%.) The EU Tax Observatory calculates that a watered-down rate of 15% “generates significantly less revenue than originally hoped for…only half of what could have been generated with stricter rules”. 

A bad deal for the global south. The FT’s Emma Agyemang reports that “preliminary analysis suggests participating countries that host significant low-taxed corporate profits will be the early winners” as they raise more tax from the multinationals that are still registered there. Remember that the OECD is a club representing the world's richest economies, so any global tax rules it designs are likely to be skewed in their interest. Many countries in the global south haven’t signed up to the deal. For instance, Africa’s biggest economy, Nigeria, would lose revenue under the OECD plan as the requirement for multinationals to have annual revenues higher than €750m means it wouldn’t apply to many taxable entities in its economy. 

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Towards a more inclusive global corporate tax framework. 

If there are limitations to the rules agreed at the OECD, what is the alternative? At the end of 2023, more than 120 mostly developing countries won a historic vote at the United Nations to set up a tax convention with legally binding outcomes, despite opposition from richer countries and a “last-minute attempt by the UK to defang the UN resolution”. Tax Justice Network says that hosting global tax negotiations at the OECD risks too much influence from tax havens and corporate lobbyists, and argues that deciding international tax rules at the UN instead would ensure more transparency, global representation and consideration of UN principles of equality, gender and environment.

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A plan with teeth? Sol Picciotto, a global leader in international tax law, outlines Tax Justice Network’s proposal for a Minimum Effective Tax Rate (METR) for multinationals that would bring in more total tax income from multinational companies in total, particularly benefiting countries with per capita GDP below $40,000. The METR aims to assess corporates’ real presence in each country by looking at factors like number of employees, physical assets and sales; it includes  a higher minimum corporate rate – “no lower than the US proposal of 21% and preferably 25% or higher” – and applies to all multinationals, “subject only to a low threshold of perhaps €50m to exclude small and medium enterprises.” The METR proposal is far more equitable for developing countries and unlike the OECD plan, it would avoid rewarding some of the most extreme corporate tax havens such as Bermuda and the British Virgin and Cayman Islands.

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‍The UK angle. Although the UK has taken an active part in these negotiations, the debate around global tax levels has still not left a strong impression on domestic political discussion, which remains focused on the overall level of taxation. Nevertheless, moves to prevent profit-shifting and create a more level playing field on corporate taxation could materially affect debates on strategies to encourage business investment, the UK’s response to ‘Bidenomics’, and how to finance public services – especially if this new global minimum catalyses more international tax cooperation.