Do we need a global minimum corporate tax?

What is a global minimum corporate tax?

A global minimum corporate tax would set the same minimum tax rate for companies globally, regardless of their operational locations. The tax rate, alongside the proposal to tax businesses solely based on their locations of profit, are the two core pillars of the Base Erosion and Profit Shifting (BEPS) initiative[1]. The BEPS initiative is intended to reduce disparities in international taxation by targeting corporations that evade tax by transferring their operations to countries with lower tax rates[2].

Although the global minimum corporate tax was first proposed in 2019, it did not receive much attention until early April this year, when the U.S government proposed it. The statement from the White House suggested a minimum corporate tax rate of 21%. It also recommended exemptions on revenue for countries that did not agree to implement it[3]. The plan was envisaged as a means of discouraging corporations’ use of tax havens.

Why might we need a global minimum corporate tax?

International corporate tax abuse and private tax evasion cost the world over 427 billion USD each year[4].  When considered alongside the COVID-19 pandemic, these illegal tax activities place further strain on many countries’ national budgets. A global minimum corporate tax is a potential solution to support countries in their recovery pathway. It would encourage a more sustainable competitive environment within countries, where they need to seek other initiatives, such as improving the infrastructure or opening their economies rather than a low corporate tax. While a global minimum corporate tax undoubtedly has benefits, there are downsides which must be considered.

Global tax rate, global challenges

The disparity in corporate tax rates among countries creates significant challenges when discussing a single global minimum tax. For example, corporate tax rates between European countries vary greatly, despite most of them being European Union members. Compare Ireland’s rate of 12.5% with 9% in Hungary, or the relative highs of Portugal’s 31.5% rate and 32.5% in France[5]. While countries with higher tax rates will not be affected, countries with lower tax rates may struggle to adjust.

Another challenge is that corporate tax not only affects countries’ national budgets, but is also part of many countries’ economic development strategy. Many countries, especially developing countries, have set specific corporate tax rates to facilitate their economic development. For example, Ireland’s economy has enjoyed great expansion in recent years thanks to billions of dollars in foreign investment. If this a global minimum corporate tax is passed, many developing countries would lose the opportunity for such foreign investment and will be relatively disadvantaged. Since the COVID-19 pandemic has disproportionately affected developing countries, this issue must be thoroughly considered.[6]

Inequity in tax burden distribution

The global minimum tax rate undeniably increases businesses’ operating costs. However, it is unclear whether firms or consumers will bear the costs. According to microeconomic theory, the tax incidence depends on the elasticity of supply and demand, that is, the responsiveness of quantities supplied and demanded to a change in price. A From this model, we can predict demand-inelastic markets to burden consumers with a greater proportion of tax incidence than demand-elastic markets.

Where does the world stand?

A global minimum corporate tax is a source of debate among nations. Although it has the potential to curb corporate tax evasion, many countries could be negatively impacted. To adopt such a globally impactful policy, the world must not ignore the smaller stakeholders it might leave worse off.

[1] The case for a global minimum corporate tax. (2021, April 7). Retrieved from Atlantic Council: https://www.atlanticcouncil.org/blogs/new-atlanticist/the-case-for-a-global-minimum-corporate-tax/

[2] What is BEPS? A BEPS definition. (n.d.). Retrieved from Thomson Reuters: https://tax.thomsonreuters.com/en/beps/what-is-beps#:~:text=The%20Organization%20for%20Economic%20Cooperation,moving%20operations)%20or%20by%20migrating

[3] Strupczewski, J. (2021, April 7). EU backs U.S. call for global minimum corporate tax, but rate to be decided. Retrieved from Reuters: https://www.reuters.com/article/us-usa-treasury-yellen-eu-idUSKBN2BT1YG

[4] Mansour, M. (2020, November 20). $427bn lost to tax havens every year: landmark study reveals countries’ losses and worst offenders. Retrieved from Tax Justice Network: https://www.taxjustice.net/2020/11/20/427bn-lost-to-tax-havens-every-year-landmark-study-reveals-countries-losses-and-worst-offenders/

[5] Reuters. (2018, January 5). Hungary, Ireland oppose EU-wide tax harmonization efforts. Retrieved from Reuters: https://www.reuters.com/article/us-hungary-ireland-taxation-idUKKBN1ET1ZY

[6] Khalid, S. (2021, April 15). Commentary: Why the call for global minimum corporate tax is a bad move. Retrieved from Channel News Asia: https://www.channelnewsasia.com/news/commentary/global-minimum-corporate-tax-rate-yellen-evasion-haven-digital-14620234