This article is part of our special report International taxation and green public investments.
Rich countries profit more from the recently announced OECD tax deal than developing countries, according to a new policy study, putting claims that the global tax system had become fairer into question.
When 136 countries agreed to a tax deal on 8 October, “historic” was one of the most popular descriptions of the result. Commission president Ursula von der Leyen hailed the result as a “historic moment” and “a major step forward in making our global tax system fairer.”
With the roar of approval from rich countries, it was easy to miss the criticism from some less affluent countries who argued that the reform mainly benefitted rich countries. Robert Sweeney, senior economic and policy analyst at the “Think-tank for Action on Social Change” (TASC), has now put numbers to this criticism in a recent policy study commissioned by the Foundation for European Progressive Studies and the Friedrich-Ebert-Stiftung.
The rich win
The tax agreement stands on two pillars. Firstly, a part of the profit of large and highly profitable firms will be allocated to the countries where the revenue is generated instead of the country that hosts the headquarters. Second, a global corporate minimum tax of 15% should put a backstop to the downward spiral of global tax competition.
Sweeney’s main point of criticism is that the allocation of profits in the first pillar of the tax agreement is calculated according to the revenue a company generates in a country. Countries with a large and relatively wealthy population generate more revenue for the companies. They will thus be allocated more of the tax revenue than countries whose citizens have less purchasing power.
“If you allocate taxing rights based on where multinationals generate their revenue, it’s going to hurt poor countries”, Sweeney said.
According to him, other factors than revenue could determine the allocation of taxing rights, for example, where the tangible assets are located or how many employees there are. These factors can be combined in a method called “formula apportionment.”
“If you include the number of employees and tangible assets, that makes the formula more progressive. But to the extent that the formula is weighted towards revenue and payroll, it’s going to be regressive. And the current move to allocate taxes according to revenue is regressive”, Sweeney said, criticising the OECD deal.
In his policy study, Sweeney calculates that high-income countries would receive 26% more corporate taxes than today if the tax allocation was based on revenues exclusively. Upper middle-income countries (e.g. China) would lose 10%, lower-middle-income countries would lose 11%, and low-income countries would lose 50% of their corporate tax revenue in this scenario.
Unequal results in Europe
The EU would increase its revenues by 14%, according to these calculations.
Within the EU, however, the allocation according to revenue would lead to highly different outcomes. Belgium, Croatia, Estonia, and Greece could double their corporate tax revenues in a revenue-based system. According to the study, Cyprus, Hungary, and Poland would see their corporate tax revenues cut down by half and more.
In addition to his simulations of different ways of tax allocation, Sweeney also calculated the effect of the minimum effective corporate tax rate on tax revenues. While he welcomes the imposition of a minimum tax rate, he thinks it should be 25%.
“There is a nonlinear effect when you move from 15% towards a 25% effective tax rate”, he explained. A move from 15% to 25% would result in much more additional tax revenue than a move from today’s situation to the recently agreed 15%.
Abolish the carve-outs
Sweeney acknowledged that a minimum effective tax rate of 25% is currently not politically feasible. “It seems to be a done deal, and only the technicalities are yet to be ironed out”, he said.
One of those technicalities is the possibility of carve-outs in the agreement on the minimum effective tax rate. “Companies will be able to reduce the amount of taxation by 10% of their payroll and 8% of their tangible assets for the initial years of the agreement”, Sweeney explained.
“As the deal becomes finalised, I think that it would be feasible for those exemptions to be abolished”, he said.
On 30/31 October, the heads of state of the G20 are expected to greenlight the OECD tax agreement. A directive to implement the minimum corporate tax rate is expected to be proposed by the EU commission in December of this year. The implementation of the tax allocation reform should then be in 2022.
[Edited by Alice Taylor]