The G7 Tax Clampdown Signals The End Of Hyper-Globalization

Context: The tax deal has struck an appropriate balance of divergent interests to smoothen out some rough aspects of globalization.

Pillars of G7 agreement on global minimum taxation on corporate profits

• Proposes a global minimum tax of 15%: Applicable on multinational companies (MNC) with profit margins of at least 10%
• A portion of MNC’s global profits will be distributed to business countries: MNCs would have to allocate 20% of their global profits to countries where they sell their products and services, regardless of the location of their physical headquarters.

Need for global taxation:

• Presence of loopholes: Since the race to the bottom in corporate taxation began in the 1980s, the average statutory rate had come down from nearly 50% to around 24% in 2020.
  • Many countries have generous loopholes and exemptions that reduce the effective tax rate to single digits.
  • Global firms have been able to shift profits to pure tax havens such as the British Virgin Islands, Cayman Islands or Bermuda, without having to move any of their actual operations there.

Objections against the global minimum taxation agenda

• Against tax-justice: As 15% global minimum tax rate viewed too low.
• Impedes ability of developing countries to attract investment: Small countries such as Moldova (12%), Paraguay (10%), and Uzbekistan (7.5%) that have set their rates particularly low to attract foreign investors, whom they see as a source of quality jobs and advanced technologies.
• Lack of consensus among developed countries:
  • Ireland, with a low tax rate of 12.5%, may lose its competitiveness, similar concerns from Singapore and Netherlands.
  • The US and high-tax European countries might complain about losing tax revenues if poorer countries maintain their lower rates.

Way Forward:

• Flexible taxation:
  • The argument for enforcing a common floor on corporate taxation is strongest when countries have similar preferences and want to avoid a ‘prisoner’s dilemma’ in which their only reason to lower taxes is to prevent capital from going elsewhere.
  • A global taxation regime that enhances the ability of individual countries to design and administer their own tax systems in light of their own needs and preferences is likely to prove more robust and durable than attempts at international tax harmonization.
• Taxation as a global rule to tackle the beggar-thy-neighbour action: Often displayed by the tax havens that have been doing global corporations a great service by facilitating tax avoidance, at considerable costs to other countries