G20 finance chiefs, representing the world’s largest economies, signed a deal designed to prevent multinational companies from shifting profits to low-tax tax havens.
Under the agreement, there will be an overall minimum corporate tax of 15 percent. New rules will be drawn up for large companies, including tech giants like Amazon and Google, to pay taxes in countries where they earn income, even if they are not physically present there.
The deal was approved at the meeting of G20 finance ministers and central bankers in Venice over the weekend. Whether it will be adopted remains to be seen. There are still several low-tax countries that refused to sign, including members of the European Union, Ireland and Hungary.
Their support is needed in order to secure approval of the deal by the EU, where a unanimous vote is required. Speaking after the deal was struck, US Treasury Secretary Janet Yellen said maximum pressure would be applied and holdouts would be “encouraged” to sign before the deal was finally ratified. a meeting of G20 leaders in October.
Even if they did not, other measures could be used. She said the deal contained “the kind of enforcement mechanism” that resistant countries would not be able to undermine.
Yellen and the Biden administration have their own problems getting approval from the United States. The tax agreement comes in two parts, referred to as pillars. The first pillar, promoted by the European powers, allows higher taxation of multinational companies. Pillar 2, which was promoted by the United States, sets the global minimum corporate tax rate at 15%.
The two parts of the agreement are interconnected. Pillar 1 approval in the United States may require changes to existing treaties, requiring a two-thirds vote in the Senate, which is split 50-50 between Republicans and Democrats. If Pillar 1 fails, then all bets are off and European powers move forward with digital taxes imposed on America’s big tech giants. If that were to happen, it would mean a return to the kind of confrontation that occurred under the Trump administration that the tax deal aims to avoid.
Even if the deal is implemented, it will not bring a significant increase in tax revenue, as experience has shown that large companies certainly design new avoidance mechanisms.
The tax deal was the focus of the meeting, with key issues of an increased deployment of the COVID-19 vaccine and the related issue of debt relief for poorer countries all but ignored.
The meeting statement contained catch phrases such as “we remain committed to bringing the pandemic under control everywhere as soon as possible” and declared its support for efforts to speed up vaccine delivery. But no money has been allocated and no specific proposal has been made to achieve these goals.
Ahead of the meeting, IMF Managing Director Kristalina Georgieva warned of a “worsening two-track recovery”, due in part to differences in vaccine availability. She called for “urgent action” by G20 leaders and policymakers at this “critical time”.
It was not long in coming, whether on the issue of vaccines or on the increase in the debt of many poor countries, due to the serious economic and financial problems resulting from the pandemic.
Last week a Washington post David Lynch’s article highlighted the significant increase in indebtedness, as countries in Asia, Latin America and Africa stepped up their borrowing.
The result is that emerging market borrowing at the end of March totaled $ 86 trillion, up $ 11 trillion during the pandemic. So far, money flows to emerging markets have been sustained, as their debts offer better rates of return than in the United States, due to the ultra-low interest rate regime maintained by the Fed. .
However, according to the article, if monetary conditions in the United States tighten faster than expected, it could trigger a “wave of capital flight that could shake both emerging market borrowers and the US economy.”
Since much of emerging market debt is denominated in US dollars, these countries would face either a rise in interest rates in an attempt to stop capital outflows, possibly causing a recession in their economies, or to let the value of their currencies fall, thereby increasing the local currency cost of repaying dollar-denominated loans.
Last year, a Debt Service Suspension Initiative (DSSI), implemented by the G20, saved 43 poor countries some $ 5.7 billion, a level described by the economist in World Bank chief Carmen Reinhart as “disappointing”. The total cost of maintenance for developing countries this year is expected to be $ 1.1 trillion.
Agustin Carstens, managing director of the Bank for International Settlements, sometimes described as the bank of central banks, warned that developing countries were on the verge of exhausting their borrowing capacity.
In an interview with the Financial Time last week he said: “They have to start facing the music on how to kick start the growth [with] all of these things work against them… reduced fiscal space, they have no monetary space, they have higher corporate debt and higher sovereign debt. “
Carstens highlighted a significant change in the growth pattern of the global economy, following the pandemic.
“This is the first time in the world that the growth of advanced economies is greater than global growth, and global growth is greater than the growth of emerging markets,” he told the FT. “Growth in emerging markets is slowing and we are not seeing it picking up. “
Carstens said that until now, emerging markets have been able to get through the pandemic without a crisis, but that there is still a substantial risk of one. “Some of us think this might not be the final picture, and what we’ve seen so far is too good to be true.”
But warnings from the World Bank and BIS have been largely ignored. No new initiatives were announced on debt relief and debt restructuring, with the G20 communiqué saying the G20 welcomed the “progress” of the DSSI, which was widely seen as insufficient. He also said he supported the International Monetary Fund’s proposal to expand Special Drawing Rights (SDRs), which allow countries to increase their foreign exchange reserves, by an amount equivalent to $ 650 billion.
This measure has also been criticized as inadequate, as SDRs are available in proportion to a country’s size within the IMF, meaning that the poorest countries most in need of additional foreign exchange reserves would get the most. less.