EU Agreement to implement the global minimum tax is a step forward, but not enough

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The Independent Commission for the Reform of International Corporate Taxation (ICRICT) welcomes the agreement reached by the EU member states to implement the 15% effective minimum taxation component - known as Pillar Two of the G20/OECD’s “global tax deal” - as a first step towards a comprehensive reform of international taxation of multinationals.

However, ICRICT advocates for a 25% minimum tax rate, and we have legitimate concerns that the agreement on such a low global minimum rate will turn out to be the global standard and a reform that was intended to make sure multinationals pay their fair share will then end up doing just the opposite.

Developing countries, which rely relatively more heavily on corporate tax income as a source of government revenues compared to advanced economies and suffer the highest losses from corporate tax abuse, would be big losers. So too would small and medium-sized enterprises in developed countries, which cannot take advantage of the tax shenanigans available to the multinationals, and thus are disadvantaged as they pay the full local rate.

Overall, the current global tax deal remains not grounded on a proper understanding of the economics of corporate profit taxation.  Even with the deal, the multinational corporate tax system will continue to reinforce global inequities. 

In the absence of sustainable solutions, countries should not be restricted from continuing to pursue alternative measures (as required under Pillar I of the agreement) but should be able to pursue measures to defend their tax base, including in line with the overall goals of Pillar Two, leaving the reconciliation of the different approaches to later, with the objective of “leveling up,” (i.e., using the most comprehensive definition and a more ambitious rate).

Negotiations towards a more comprehensive reform should nevertheless continue under the G20 presidency of India in 2023 and Brazil in 2024 and, following the recent approval of the Africa Group’s resolution for a more inclusive and effective international tax cooperation, at the United Nations in a different format that recognises the failure of the 2019-2022 process to give effective voice to developing countries. This ultimately must provide the platform for a new round of negotiations to deliver a new global tax deal for the world.

Joseph Stiglitz, Professor of Economics at Columbia University and ICRICT co-chair says:

“The decision of the European Union countries to overcome their internal political problems and finally adopt a global minimum tax of 15% is good news. But it is also crucial that all other countries join the agreement if we are to put an end to the tax competition between countries to attract capital, where the only winners are the multinationals. And we need to be more ambitious: agreeing on a global minimum tax is a step in the right direction, but 15% is far too low. It may even push several countries to lower their corporate taxes, which is the opposite of the desired effect. In the ICRICT, we support a 25% rate, which would reduce the pressure on host countries to provide low-tax incentives for foreign firms and end the race to the bottom, with the devastating effects that tax avoidance of multinationals has had on the public finances of countries around the world”.

Jayati Ghosh, Professor of Economics at the University of Massachusetts at Amherst and ICRICT co-chair says:

“The decision of European countries to finally adopt the principle of a global minimum rate shows only one thing: that when the political will exists, anything is possible. And this is why this political will must now go much further, and why countries must adopt a minimum rate much higher than the 15% mentioned in the OECD agreement. It is also time to revisit the whole issue of governance for international tax negotiations, by truly taking into account the needs of developing countries. African countries have clearly shown this recently by asking that the debate be held at the UN level, and not only within the OECD club of rich countries. This demand must be heard, and a truly inclusive round of negotiations relaunched”.

Martín Guzmán, former minister of finance of Argentina and ICRICT Commissioner says:

“Last year, a number of developing and emerging economies, including my country, Argentina, signed the global tax agreement negotiated under the aegis of the OECD and the G20, even though we knew that this agreement lacked ambition to provide meaningful sustainable revenues to all countries. But we preferred an insufficient agreement to no agreement at all, because the principles were going in the right direction and because countries are desperate for resources after the pandemic. For a year now, the implementation of this agreement has been blocked by internal political problems in the advanced economies that would get the larger benefits, which made the situation absurd. We, therefore, welcome this decision by the European countries today. But this agreement continues to be insufficient in the face of the public finance crisis that our countries are experiencing. Developing countries must have a more effective representation at the negotiating table to address one of the most toxic problems of globalization, that of tax avoidance by multinational corporations, and thus build a more appropriate base of tax revenues for tackling the social and economic challenges that we face”.

Wayne Swan, former Treasurer and Deputy Prime Minister of Australia and ICRICT commissioner says:

“After a year of stalemate, the decision of European countries to adopt a minimum rate as stipulated in the OECD agreement signed last year is a step in the right direction. I have been following the global negotiations since they began, and I am pleased to see that it is now widely recognized that we cannot have prosperous, resilient, and inclusive societies without quality public services and social policies that target the most vulnerable. This is the only way to defend our democracies against authoritarian and populist temptations. But for this to happen, countries must go further and continue to work towards a more comprehensive agreement”.