In October 2021, G-20 leaders finalized a new global tax agreement aimed at tackling tax avoidance by large multinational enterprises (MNEs). The agreement, brokered by the Organization for Economic Co-operation and Development (OECD) and endorsed by 137 countries and jurisdictions (collectively, this group is referred to as the Inclusive framework or IF) — represents the most significant global tax reform in decades. Among other features, the “IF Agreement” introduces new taxing rights regardless of a multinational company’s physical location and a new minimum worldwide corporate income tax of 15% for the largest multinational companies.
The IF Agreement rests on two key pillars (Table 1): the first pillar establishes new taxing rights on a subset of large multinational companies (including ubiquitous digital giants like Amazon, Google and Facebook), and the second pillar establishes the base, the rate and the approach. for a new Global Minimum Corporate Tax (GloBE).
Table 1. The new IF Global Tax Agreement at a glance
Source: Data taken from the OECD/G20 Base Erosion and Profit Shifting Project “Two-pillar solution to address the tax challenges arising from the digitalization of the economy”, October 21, 2021 and BEPS 2.0: what you need to knowKPMG.
A missed opportunity to boost development finance
Almost all stakeholders seem to agree that the FI agreement represents a real step forward in the attempt to reduce a “race to the bottom” in global tax competition and to reshape the taxation of multinationals to better reflect places where companies have actual operations, sales and staff. By moving closer to a stereotypical method of allocating corporate taxes on a global scale – rather than claiming that subsidiaries and affiliates are completely independent businesses – critics and fans seem to support the company’s management. FI agreement that moves away from traditional residency rules in an increasingly complex and digitalized world. economy.
Unfortunately, when it comes to generating meaningful revenue for the Global South, low- and middle-income countries (LMICs) rightly deviate from the G-7 consensus that the IF agreement represents a “equitable solution” to reallocate global taxing rights. As G-7 countries celebrated the IF agreement as a breakthrough in ending the “race to the bottom in corporate taxation” around the world, LMICs expressed frustration and concern over various inequalities inherent in this agreement – with Kenya, Nigeria, Pakistan and Sri Lanka. Lanka refusing to sign. Currently, only 23 African countries are among the 137 countries and jurisdictions ready to implement this global agreement – less than half of all countries and jurisdictions on the continent – and many LMICs are being asked to reconsider implementing this global agreement. implementation of the agreement.
Concerns include high-income countries having first choice to collect additional “top-up” taxes on multinationals, low minimum tax rates creating a “race to the bottom” on corporate tax rates, and PRITI having to give up existing and future digital services. taxes in exchange for a new approach based on a formula for re-allocating the profits of multinationals that could undermine their revenue base (Table 2). For the new GLoBE, the current formula would provide G-7 countries, which represent only 10% of the world’s population, with 60% of the estimated $150 billion in new tax revenue generated. In effect, PRITIs are being asked to take a blind leap of faith by signing a legally binding agreement to waive certain taxing rights in exchange for a wholly uncertain and potentially damaging revenue outcome.
Table 2. Summary of the main concerns of LICs-MICs regarding the IC agreement
Source: author’s analysis.
Political headwinds to the implementation of the FI agreement
The adoption of the IF agreement poses real political challenges in major OECD jurisdictions, particularly in the United States, where the measure faces opposition from Republicans and may require the approval of two-thirds of the Senate to be adopted. EU tax laws require the unanimous support of all 27 member countries, and there are several small, low-tax countries like Estonia, Poland and Hungary that are reluctant to move forward on tax. overall minimum (second pillar and the US priority) unless the EU gives equal priority to advancing digital tax reforms (first pillar and on a slower track). Last month, Poland vetoed the EU’s latest attempt to approve the new global minimum tax on this basis. These ongoing standoffs have called into question the overall fate of the FI deal.
What future for the PRITIs on global tax governance?
As the IF deal faces potentially fatal political challenges to its implementation, the LRICs would do well to keep their distance and refrain from taking steps to implement it themselves in the short term. . This is especially true when it comes to eliminating existing or planned taxes on digital services, as the US and Europe have pressured them to do, including through the threat of potential sanctions.
In the best-case scenario, the FI agreement will help create a more permissive environment and momentum for LMICs to introduce their own more aggressive anti-avoidance measures, including revising their tax regimes to remove incentives and introducing minimum taxes. with less legal threat. action of multinationals or their country of origin. Similarly, frustrations over the substance and process of the IF agreement appear to have galvanized the momentum behind broader global tax reform, including a possible UN convention and fairer approaches to engaging LMICs. as equal stakeholders in tax governance debates. There could also be room within the G-20 to reframe the IF agreement as an initial “draft” and commit to working with IF partners to revamp key sections and address LIC concerns. -PRI over the next few years.
Remarkably, recent discussions at the IMF and World Bank Spring Meetings on additional aid, loans, debt relief and innovative financing to address the economic crisis in LMICs have gone without refer to the importance of domestic resource mobilization, and more specifically to global tax governance. reform. It’s as if G-20 donors, international financial institutions and the private sector all implicitly agreed that the FI agreement and the (seriously underfunded) Addis Tax Initiative ticked that box and that it doesn’t. There was nothing more to do here for the PRITIs. . That couldn’t be further from the truth.
Going forward, the continued political debates on the merits and evolution of the IF agreement cannot continue to take place in a vacuum – they must be deeply integrated into broader multilateral conversations on economic recovery, poverty reduction and budgetary support measures for the countries of the South.