Is it time to introduce a minimum corporate tax? – OpEd – Eurasia Review
By Lilla Nóra Kiss*
The law of unintended consequences has not been repealed. Don’t be surprised if companies find loopholes to circumvent new tax laws designed to get them to “pay their fair share.”
Major reforms must be based on a broad consensus. At the height of an economic crisis caused by the combined effects of pandemic shutdowns and sanctions for Russia’s war in Ukraine, new economic experiments such as a global minimum corporate tax could easily become another example of the law of unintended consequences in action.
Facilitating an international agreement establishing a global corporate tax minimum of 15% has been high on the Biden administration’s agenda for some time. In the fall of 2021, nearly two years into the COVID-19 era, more than 130 countries supported the adoption of a global minimum tax based on the United Nations two-pillar model. economic co-operation and development (OECD). The first pillar determines taxable presence, a vital issue in the digital age as it defines in which country a company must pay taxes in the first place. The second pillar establishes an overall minimum tax of 15% for multinational companies whose combined financial income exceeds €750 million (~$763 million) per year.
The application of the two pillars would mean that every major corporation, including dotcoms, would pay its “fair share” so that the global minimum tax could achieve its goal of reducing tax competition from below between jurisdictions (nations). However, such a new economic intervention is risky in the midst of an economic crisis. Inflation is rampant, the economy is struggling, and supply chain issues continue to plague businesses around the world. A global minimum tax could have unintended consequences such as increased costs, withdrawals of companies from formerly low-tax countries, reduced investment, even company dissolutions to stay below the income threshold. of 750 million euros per year. And make no mistake: the costs would be passed on to consumers in the form of higher prices. Reduced investment could deprive consumers of the benefits of new products and services. And crippling big business, which has driven economic growth for decades, could tip the economy into an undeniable recession. Thus, even if a global minimum tax were to prove an international political success, there is no guarantee that such an attempt at reform would achieve its objectives (reducing tax competition and making big corporations pay their “fair share”). given the current global economy and human situation. tendency to evade rules deemed punitive.
A global minimum tax is an attempt to put an international floor on corporate tax rates, which vary widely in the EU, for example. Currently, Portugal has the highest rate (31.5%), while Hungary (9%), Ireland (12.5%) and Cyprus (12.5%) have the lowest rates. Competition usually causes resources to move to higher value uses. Tax competition between EU states influences the allocation of capital within their respective private sectors. Ireland, Europe’s “Grand Master of Corporate Tax”, is proud to be home to over 800 US corporations, including Google, Facebook, Twitter, Apple and Pfizer. Surprisingly, it was not Ireland that opposed the EU directive to establish the global minimum tax, but Hungary, which lowered its corporate tax rate from 19% to 9 % in 2017. Since then, Hungary’s foreign direct investment rates have increased every year. Thus, by 2022, the United States had become the largest non-European foreign investor in Hungary, employing around 106,000 people in 1,700 companies. This number represents only a fraction of total US foreign investment in Europe, which had reached $3.66 trillion in 2020. Therefore, the short-term losers from the reform would be US companies that moved into the European jurisdictions that offered the lowest tax rates. The tax burden of these companies would certainly increase, which also means that consumers would face higher prices for goods and services. The long-term consequences would almost certainly be to harm the main competitive advantages of the mentioned jurisdictions.
Timing is crucial when it comes to potential economic reforms. Whenever legislators pass new tax rules, taxpayers, especially businesses, look for loopholes and devise techniques to avoid (or reduce) paying tax. The current proposal for a global minimum tax resembles the major reforms of 2015-2016, when the OECD adopted the BEPS action plan and the EU introduced the Anti-Tax Avoidance Directive (ATAD). These sets of rules concerned tax avoidance practices that affected the functioning of the EU market. The increased compliance burden has led to the evolution of some very creative tax avoidance techniques, such as the “Double Irish With a Dutch Sandwich”. In this scheme, large groups have combined Irish and Dutch subsidiaries to shift profits to low-tax or zero-tax jurisdictions, allowing some companies to drastically reduce their overall corporate tax rates. For example, Google reportedly transferred 19.9 billion euros (about $23 billion) to a Dutch company, which then forwarded the transfer to an Irish company located in Bermuda, where companies do not pay taxes. Don’t be surprised if the proposed global minimum tax encourages private entities to find equally creative ways to minimize their tax payments. And if Pillar Two is implemented without Pillar One, digital companies could continue to profit in multiple jurisdictions while only paying taxes where they are headquartered. The first pillar could bring digital businesses under the umbrella of a global minimum tax, regardless of their physical location. This would affect, for example, large US tech companies residing in Ireland.
It bears repeating: strict and constraining rules create strong incentives to find loopholes. The adoption of minimum tax rates globally will be no different unless businesses are willing to understand their responsibility in changing the existing economic environment. Governments can impose a minimum tax rate of 15%; however, they cannot require companies to enter international markets or exceed 750 million euros per year. Companies will modify their products and services to adapt to new economic conditions or change their business models. Rooted players are the most adaptable to changes, especially those deemed unfavorable, and will find ways to pay less tax. This is why major reforms must be based on the broader consent of those who are regulated. Without a law-abiding attitude and a commitment to change, initiatives such as the global minimum tax will not achieve their goals.
Now is not the best time to try an experiment like the proposed global minimum tax. The reorganization of incentives within the EU threatens to shatter a Western alliance that is trying to counter the economic fallout from the Russian offensive in Ukraine. Unintended consequences indeed.
*About the author: Lilla Nóra Kiss, Ph.D., is a Visiting Scholar at the Antonin Scalia Law School at George Mason University, whose research focuses on the digital economy, social media, and freedom of expression. Dr Kiss worked as an EU expert for the Hungarian Ministry of Justice (2020-21) and as a researcher at the University of Miskolc, Hungary (2015-20).
Source: This article was published by the Acton Institute