Finance ministers of the G20 economies have backed a landmark deal to prevent multinational companies from shifting profits to tax havens. The deal will introduce a minimum global corporate tax rate of 15% to deter big companies from exploring their options for the lowest tax rate. The deal will also shift how hugely successful multinationals such as Amazon and Google are taxed. Taxes for such multinational companies will come to be based partly on where they sell their products and services, as opposed to being based on the location of their headquarters. The deal marks an end to eight years of debate over the issue, with national leaders expected to give the deal the final go-ahead in October at the G20 Rome summit.
Members of the G20 group include Britain, Germany, France, India, Japan, and Mexico. The group accounts for over 80% of global gross domestic product, 75% of global trade, and 60% of the globe’s population. While most G20 economies appear to be on board with the plan for a global tax crackdown, some countries are yet to sign the pact. These countries include Ireland, Hungary, and Estonia, and other non-European nations such as Sri Lanka, Kenya, Nigeria, Barbados, and St Vincent and the Grenadines. These nations are being encouraged to sign up to the agreement by October.
The agreement is a landmark moment for the global economy. Each country that has signed the agreement will commit to a two-pillar plan to drastically reshape the global tax system, says the Organisation for Economic Co-operation and Development (OECD) in a statement.
The announcement builds on a previous agreement between the G7 Group in London last month. It will unite all of the G20 group nations, including Russia, Brazil, China, and India. However, some countries, including Hungary, Estonia, Kenya, and Sri Lanka, are yet to commit to the reforms. A number of jurisdictions that are commonly regarded as “tax havens'' were among signatories to the agreement. This included Gibraltar and the Cayman Islands.
The reforms are currently being negotiated in talks organised by the OECD, but the basis of the agreement is that multinational companies would be forced into paying a minimum of 15% tax for each country in which they operate. The agreement also includes arrangements to prevent the moving of profits into tax havens by powerful companies by empowering signatory countries to tax such companies based on revenues generated within their borders. According to the OECD, over $100 billion is expected to be produced by controlling profit shifting, and approximately $150 billion is expected to be produced through the introduction of the global minimum tax rate.
Further talks on tax reforms will take place between finance ministers at G20 meetings next month in Venice. The goal is to reach a final global agreement by October, to then be implemented by 2023.
The Biden Administration has proposed sweeping tax reforms to the OECD intended to limit multinational corporations’ ability to move profits overseas, in addition to a worldwide minimum corporate tax rate.
Plans leaked to the Financial Times showed that the administration is pushing for multinational corporations to be taxed not only on the basis of where they declare their profits, but where their customers are situated.
The administration’s proposals are designed to tackle the disproportionately low tax rates paid by international firms, including major US tech giants. Apple has become a prominent example, paying an effective tax rate of under 1% due to declaring its profits in Ireland.
Paul Monaghan, CEO of Fair Tax Mark, said that the proposed changes “would have a seismic impact on the likes of Amazon, Apple, Facebook and Google ... with billions of additional taxes paid in the US and across Europe.”
The move marks a significant shift away from past US policies, which proritised the tax sovereignty of nations.
In addition to this, the Biden administration is also backing the establishment of a global minimum corporate tax rate agreed upon between some of the world’s largest economies. The agreement is intended to stop countries from luring foreign businesses by offering tax discounts.
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Corporation tax in the US currently stands at 21%, compared to 19% in the UK and 12.5% in Ireland. The Tax Foundation estimates the worldwide average for statutory corporate income tax at 23.85%, or 25.85% when weighed by GDP.
The US’s proposals to the OCD came after G20 finance ministers agreed on Wednesday to work towards an international consensus on tackling tax avoidance.
Following the Panama Papers leak of files from last year, earlier this month, the Paradise Papers leak once again threw light on the world elite’s hidden wealth. 3.4 million confidential documents relating to offshore investments were leaked to Suddeutsche Zeitung, the same German newspaper that took hold of the Panama Papers in April, 2016, which then shared them with the International Consortium of Investigative Journalists (ICIJ) and a network of more than 380 journalists. The files reveal that large corporations, heads of state, politicians, celebrities and High-Net-Worth individuals are investing huge amounts of money in offshore tax havens. Surprise, surprise. And whilst about 100 media outlets worldwide are pouring over the findings, that include the Queen’s private estate allegedly being invested in a Cayman Islands fund, as well as offshore dealings by Donald Trump’s cabinet members, advisers and donors, a lot of people have asked the question: “What exactly is the problem considering that tax avoidance is legal?”
Panama Papers vs. Paradise Papers
Of course, as with everything, opinions are divided with many ordinary people finding tax avoidance to be offensive and unfair, while others feel that it is a perfectly fine way to save some of their hard-earned money. However, does the muted response to the Paradise Papers scandal show that we don’t care as much anymore?
Following the leak’s predecessor, the Panama Papers, thousands of people gathered to protest, which immediately resulted in politicians stepping aside and losing their jobs. Iceland’s ex-Prime Minister, Sigmundur Davíð Gunnlaugsson, resigned amid widespread protests and outrage over allegations that his family had sheltered money offshore. In contrast, it seems like this time around, the public anger has been on a much smaller scale. Last year, US President Barack Obama called for international tax reform in the wake of the Panama Papers, whilst admitting that “The problem is that a lot of this stuff is legal, not illegal.” However, whilst some wealthy public figures suffered personally and governments and organizations have put out a handful of fixes in recent years, the system remains perfectly intact.
So, are we all silently waiting for that potential reform, or have we simply come to terms with the fact that tax avoidance is fine and the rich and powerful will continue dodging tax?
The morality of offshore tax havens
It is a fundamental principle of democracy that everyone obeys the law. The law applies to everyone. The law states that we have to pay taxes. Whilst in most cases, putting your money outside of your financial regulations is legal, many argue that dodging taxes is morally wrong. In addition, according to a letter to world leaders from May 2016, more than 300 economists argue that: “The existence of tax havens does not add to overall global wealth or wellbeing; they serve no useful economic purpose.”
By sheltering trillions of dollars offshore ($10 trillion according to Boston Consulting Group), the world’s top end make their money untaxable, depriving governments of hundreds of billions of dollars of tax revenues each year. Niels Johannesen, an Economics professor at the University of Copenhagen discusses the consequences of this behaviour: “Either a lot of people pay more taxes [to compensate], or there’ll be less public goods - schools, hospitals, and so on.” He also adds: “Given that this offshore wealth is to a large extent owned by the very wealthiest… it is people who should be paying the highest taxes who are evading the most.”
Thus, not only do offshore tax havens not serve any economic purpose, but they’re also immoral and deprive economies of funds that could be used on improving public services. Some politicians are recognising the issue, such as the Leader of UK’s Labour Party Jeremy Corbyn, who promised that if his party wins the next General election, it would clamp down on tax havens and end loopholes. The Paradise Papers have once again highlighted the need for this to happen. Yet, the notion that the majority of those involved are ‘getting away’ with tax avoidance, paired with the seeming apathetic response from the public appear to be rather worrying.
