The pandemic before it and the energy tsunami that followed have made uncertainty routine and preparing economic forecasts a risky exercise. They have also attested that every crisis has losers, a sack into which the most vulnerable always fall, and winners at the same time, in this case a number of large companies that have fattened their margins in the heat of an unfortunate situation for the majority. However, this increase in corporate profits has a double meaning: it means more tax revenue for states when the new international tax framework agreed in the Organization for Economic Co-operation and Development (OECD) is applied. The body, in a document released Wednesday, estimates that the 15% minimum rate for multinationals will net $220,000 million, 46% more than expected in 2021, as between more than 130 countries Consensus was reached to end tax avoidance by big corporations. The new scheme for redistributing corporate profits between countries – the other pillar of the global compact – will affect a larger share of corporate profits: $200,000 million (184,000 million euros), 60% more than originally calculated. In addition to increasing corporate profits, this review will be impacted by changes in the design of the new system.
Coordinated by the OECD and the G20 between constant tug-of-war, technical tirades and political wrangling, it took almost eight years for the agreement to see the light of day. Its main aim is to do away with the previous rules of the game that made corporate tax payment conditional on physical presence in the territory. With the advent of globalization and digital business, this assumption has lost its meaning as companies can generate customers, income and profits in any territory without having offices or employees there. Based on the same logic, companies are also able to divert profits to low-tax countries and reduce their tax burden. A practice that has spread since the 1990s and has unleashed perverse effects: it has sparked a tax race to the bottom between states, resulting in a loss of between 4% and 10% of global corporate tax revenue every year.
The two internationally agreed measures – known in technical jargon as pillar one and pillar two, the further technical details of which are still being discussed – provide on the one hand for a system that distributes the profits of the largest multinational corporations more fairly on the planet, so that the countries in which they no physical presence but have a business, have tax rights over them. In other words, it will oblige these groups – around 100 according to the OECD estimates – to pay part of the taxes in all the territories in which they operate. On the other hand, corporate tax has a floor of 15%: if a company pays a lower rate in one of the countries where it operates, it pays the difference in the territory where its parent company is based.
“You don’t want to completely eliminate international tax competition, but you do want to set a floor,” stressed David Bradbury, deputy director of the OECD Center for Tax Policy and Administration, in a video conference this Wednesday, recalling the latter’s forecasts are preliminary, since there are still fringes to close. In fact, the practical implementation of the agreement has been delayed and is not expected before 2024. The economist explained that the improvement in the survey forecast for the minimum rate — 9% of global corporate tax receipts — was due to access to better quality data that has shown an increase in low-taxed profits, as well as changes in the design of the measure. For tax rights, the guidance adjustment — ranges from $125,000 to $200,000 million in profit — will be impacted by both technical changes and higher-than-expected corporate earnings, particularly in 2021.
According to the analysis, up to half of what is known as Pillar 1 would come from the technology giants, which include telecommunications companies, digital platforms or manufacturers of electronic goods such as mobile phones or semiconductors. The other 50% would come from companies in other areas where pharmaceutical companies stand out that have increased their margins with the pandemic, or food. This system will result in an additional collection of between $13,000 and $36,000 million worldwide using 2021 data. If the 2017-2021 average is taken into account, the range would be between 12,000 and 25,000 million.
Regardless of the data, the OECD insists that these “significant increases in tax collection underscore the importance of swift implementation of both pillars for all countries.” Meanwhile, the World Economic Forum is taking place in Davos (Switzerland). The event, which brings together the crème de la crème of the political and economic world, could not ignore the damage that the current inflationary whirlpool is doing to the most disadvantaged while enriching the rich, icing on the cake of a global economy that has grown strongly thanks to globalization and at the expense of deep inequalities. Numerous roundtables addressed the widening gap between rich and poor following the pandemic and war crisis and the need for the business elites and large multinationals to do more to address it, a call they have joined the government of Spain . Oxfam Intermón recently quantified this phenomenon: it calculated that the richest 1% grabbed 63% of the world’s newly created wealth between the end of 2019 and 2021, while around 1.7 billion workers lost purchasing power due to rising prices.
So far, several countries have taken concrete steps to implement the new international tax framework. The greatest progress has been made in the application of the minimum rate of 15%, the technical details of which are at a more advanced level. After months of wrangling and hesitation, the EU reached consensus in December on a 15% community minimum rate to replace national systems already working in several member states, including Spain. Great Britain and the USA are also going in the same direction, Singapore, South Africa, Hong Kong or Switzerland have also announced that they will implement the standard, others such as Australia or Malaysia have opened public consultations on implementation.
Developing countries
The extra revenue that the new tax framework will bring will be split between low, middle and high-income countries, while so-called investment hubs – tax havens or aggressive taxing states like the Netherlands – will bear the brunt. The OECD, which has not yet broken down the impact of its review by country, notes that some recent technical changes will primarily benefit developing countries, including measures that protect smaller jurisdictions from losing tax rights or the priority assigned to developing countries when the location of business customers cannot be clearly determined.
Widespread implementation will help stabilize the international tax system, improve tax certainty and prevent the proliferation of unilateral taxes on digital services and related tax and trade disputes, which, according to the OECD analysis, can hurt global GDP by up to 1% per year,” adds the institution.
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