Tax deal could remind the world of the value of the G7

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Lots of things straddle this weekend’s advanced economies summit, which will be hosted by UK Prime Minister Boris Johnson in Cornwall, England.

As leaders produce flowery statements that declare unity on key issues and call for concerted action to resolve them, the most important outcome will be their agreement to promote global reform of corporate taxation.

There is a long road between a G7 declaration and changes in national tax laws, but a show of unity on this controversial issue would create momentum for reform and remind the world of the value of the G7.

Global corporate tax rates have been falling for decades. According to a study, the average corporate tax rate around the world has fallen by more than half over the past three decades, from 49% in 1985 to 24% in 2018. This corresponds to data from the United Nations. Economic Cooperation and Development, which show that the average corporate tax rate in advanced economies fell from 32% in 2000 to around 23% in 2018. Corporate tax rates in Japan reflect this trend, declining about a quarter since 2003.

Much of the drop reflects efforts by smaller countries like Ireland or the Netherlands to lower their tax rates to encourage larger companies to set up their headquarters there. This is particularly attractive to companies whose significant income comes from intangible assets like intellectual property, which do not require a substantial presence to administer.

This gave rise to what Nobel Prize-winning economist Paul Krugman calls “the pixie economy,” a phrase coined when Apple was forced to declare that previously stateless income had been generated in Ireland: a legal change from residence resulted in a 25% increase in Irish GDP. Globally, up to $ 700 billion in taxes from the world’s largest companies ended up in tax havens in 2017.

This arrangement is good for businesses, as it inflates their bottom line, and countries that earn tax revenue. It’s not so good for governments that lose revenue that would otherwise be available for social services or other needs; instead, they go without or find other ways to raise funds, which often weighs on taxpayers.

Governments have debated for decades how to reverse this decline. The deal was elusive until last week. In London, G7 finance ministers agreed to set a floor of 15% on taxes paid globally by multinational corporations. An internationally agreed floor, explained US Treasury Secretary Janet Yellen, “would end the race to the bottom in corporate taxation and ensure fairness for the middle class and workers in the United States and the United States. world ”.

The deal should be easy since all G7 countries already have corporate tax rates above 15%. Even an administration like Donald Trump’s, which has always favored lower corporate taxes, should have been able to strike a deal.

But European governments are complaining that US tech giants are avoiding any tax on digital revenue generated in their country and have threatened to impose a digital tax on those sales. The Trump administration threatened tariff retaliation if they did. European officials were also concerned that a minimum tax that disregarded how and where the revenue was generated would leave them out, believing that US-based companies would pay the US bills and other stiff governments.

The position of the Biden administration is that countries should have the right to tax the profits of certain companies where they are generated, even if this means that the United States will waive some of its rights to tax those profits. . The deal reached in London is a big deal that allows countries to tax 20% of the profits of “the biggest and most profitable multinational companies” which have profit margins of at least 10%. There is a formula to be worked out that will establish exact amounts.

This agreement was hailed as a breakthrough. Unfortunately, nothing is guaranteed. The G7 agreement is useful, but it is only a first step. It is to be adopted by the G20, which meets later this summer, and then by the OECD, where 139 countries are debating a global agreement.

Difficulties are already appearing. British Chancellor of the Exchequer, Rishi Sunak, is said to be seeking a waiver for financial firms headquartered in London. It is bad form for the meeting host to look for exceptions to the agreements he has negotiated.

The opposition will be particularly strong in the US Congress, which must ratify any changes to international tax treaties. Republican senators denounced the deal as “crazy”, “bad” and “anti-competitive, anti-American and harmful to us.” Small countries that depend on their tax haven status may also object, although there are ways to reduce the importance of the objection: a minimum tax would only add another layer of taxation that is inevitable.

There is another benefit to this agreement: a reminder that multilateralism among the richest countries in the world is still possible and still matters. The G7 has been ridiculed for being a photo opportunity that does little for global governance. Its members once dominated the international economy, but this is no longer the case. The G7 countries controlled 50% of world GDP in 1970; in 2019, that number fell to 30%. Today, the main instrument of economic governance is the G20.

The G7 could however be relevant as an avatar of democratic and values-driven leadership and some leaders see the institution moving in this direction. But whatever form it takes, the G7 must first demonstrate that it matters, that it can deliver more than dazzling rhetoric and deliver real, tangible results.

The Japan Times Editorial Board

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