Profit shifting and paying for a recovery: why a global tax plan is being hailed as ‘historic’

In some ways it started in Britain, and now it may have ended in Britain.

The corporate practice of shopping for locations abroad to report profits and pay related taxes is nearly a century old. By some estimates, it costs governments $600 billion a year in lost tax revenue. After all, why pay 20% or more in your home country when you can devise a legal means to pay next-to-nothing in some distant, sunny locale?

The scarcity and hardship this creates have prompted even sceptics to call a deal reached in London last week among G7 countries to commit to a minimum tax rate for multinational corporations “historic.”

The effort builds on years of discussions among OECD members about shoring up a global system that, decades after ways of manipulating it were pioneered in Britain, US states including Delaware, and European countries like Switzerland, has become a widely-shared problem.

Under the proposal agreed on by the G7, a company paying a tax rate of 5% on profits selectively reported in a location abroad would now face an additional 10% in its home country – to reach a 15% minimum. The idea is to neutralize the ability to undersell; no matter how little a jurisdiction chooses to charge a company from a part of the world party to the agreement, that company would still have to make up the difference to hit at least 15%. The G20 is expected to take up the matter next month.

Corporate tax avoidance isn’t necessarily illegal (indeed, it supplies lucrative business to law firms and consultants), but its increasing prevalence and complexity have forced authorities to scramble to keep pace.

Multinational corporations have been moving 40% of their foreign profits out of countries where the money was made and into lower-tax areas, risking political and economic backlash in the process, according to the economist Gabriel Zucman.

The EU Tax Observatory, now headed by Zucman, published a report earlier this month estimating that international coordination on a 15% minimum corporate rate would generate about €50 billion in added tax revenue in the EU this year, and nearly as much in the US. While Zucman called the 15% rate low, he added, “it’s a start.”

Zucman is not the only expert who thinks 15% is inadequate.

Still, the need for tax revenue is particularly urgent as countries seek to rebuild amid a lingering pandemic, and some argue greater corporate contributions would help dramatically.

In addition, diminished corporate tax revenue has been cited as a hindrance to efforts to achieve the UN Sustainable Development Goals.

In Europe, the corporate income tax system is no longer fit for purpose, according to a paper published last month – which cited a downward trend in rates in the region as a “telling sign of international tax competition at work.”

Regardless of pressing need or good intentions, however, there are concerns about the resilience of a global corporate tax deal that may or may not be finalized. Some have pointed to the indifferent reaction of stock markets to the G7 agreement as a sign that we’re really not on the cusp of dramatic change (though the wisdom of markets is not infallible).

There are also concerns about fairness.

Some critics say the deal privileges the small group of wealthy countries where the biggest corporations are headquartered, which may see more than half any resulting tax revenue increases – while lower-income countries that traditionally lose a higher share of their tax revenue to corporate abuse would gain relatively little.

The Forum’s recent Jobs Reset Summit included a dedicated session on the effort to establish a global minimum corporate tax – with the chief executive of the Tax Justice Network describing the setting of a 15% rate as potentially “the biggest change in 100 years of international tax rules.“ It’s available to watch in its entirety here.

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