On the weekend, G7 members negotiated and settled on an agreement that will allow the introduction of a global minimum corporate tax rate. In essence, the agreement has two pillars: taxation in the country where the company operates, and the minimum baseline. These new rules will hit any company with a profit margin of more than 10%. Twenty percent of profits above the 10% margin will be taxed in the country where the company operates and represent an additional tax on top of the standard VAT rate. On top of that, governments are expected to introduce a worldwide 15% minimum tax rate on corporate income.
G7 members were congratulatory, but are expected to have further negotiations first at the G20 level, then at the OECD. Since taxation remains an exercise of national sovereignty, the G7 agreement is merely a declaration of intent to lobby for this deal, not that it will automatically go into effect. To that end, a set of questions remains unanswered at this point. For one: with which mandate did the European Union agree to this agreement at the G7? The European Union has no say over questions of taxation, and despite the European Commission’s incessant lobbying on the issue, the European Council needs to approve and tax measures unanimously. Moreover, which sanctions regime is being suggested for those countries which do not play by minimum tax rules? Are all participating countries supposed to block all trade with non-compliant nation-states?
Just to bring some perspective to the conversation: ten countries, including Bahrain, the Bahamas, and Vanuatu, charge 0% corporate income tax (CIT). Two European countries, Hungary and Montenegro, charge only 9%, while Andorra, Bosnia and Herzegovina, Bulgaria, Gibraltar, North Macedonia, Moldova, Cyprus, Ireland, and Liechtenstein would also need to increase their CIT rates to reach the 15% threshold. And that’s only the easy part of the equation.
On one side, the question will be how individual countries will be ranked when it comes to their CIT. While the United States practices a corporate income tax rate that would qualify under these new rules, some jurisdictions within the United States, namely Delaware, have a different approach. Delaware does not impose corporate taxation on companies that do not do business in the state. On top of that, what happens to tax rulings? Many countries in the world, including those with a high CIT that argue for a minimum tax rate, practice regular tax agreements with individual companies to attract them to their marketplace. Will those agreements also be revisited?
Lastly, the most egregious possible outcome from these new rules is that jurisdictions that have to increase their CIT are perfectly able to hand the money back to local businesses in subsidies. Many European countries constantly get a free pass from the European Commission on subsidising or even bailing out their local industries. So yes, while they might already apply high CIT rates, they regularly risk WTO disputes over the protectionist subsidies they provide to their local businesses. It is so striking to see that world leaders find it easy to agree on minimum taxation rates, but have very little to say about their systems of state aid.
Being from Luxembourg myself, I know the advantages of competitive tax planning. The fact that Luxembourg is a more lenient marketplace than its immediate neighbours has saved many businesses from the ruins of being successful in their own countries. French labour and taxation rules allow few companies to grow steadily, which makes it all the more likely that they take the easier road and sell to the highest bidder. In a very French manner, instead of recognising this mistake and easing labour and tax rules, the government looks at the impending market concentration and decides to double down. Oh, Amazon bought another local business? The problem is probably because we did not tax enough!
The conversation about global tax rules is tiresome because they deal in the age-old erroneous belief that companies actually pay taxes. Again, only three actors in a company can pay taxes: shareholders through reduced dividends, workers through receiving lower salaries, or consumers through paying higher prices. Nobody else can pay the tax; the building cannot, the carpets cannot. The fallacy of the corporate tax is, in its fundamental essence, not just that the negotiations between countries lead nowhere, but that the tax in itself is just another tax on consumers.
This article was first published by the Austrian Economics Center.
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