Global Corporate Tax Agreement: Winners and Losers of the Multinational Minimum Tax

The world’s major economies would be the biggest winners from the preliminary agreement negotiated by the OECD, while tax havens would be the biggest losers.

Great countries to win

The United States, Germany, France, etc… the largest countries in the world are those where multinationals do most of their business but have fewer and fewer tax centers.

These countries should benefit from a measure that would redistribute part of the corporate taxes collected to the countries where the multinationals actually make their profits.

Imposing a minimum rate of 15% (with less scope for lowering it) would also increase the amount of tax revenue to be distributed.

According to the OECD, which conducted negotiations that resulted in a draft agreement on tax reform between 131 countries, setting a minimum effective tax rate of 15% would generate an additional 150 billion euros (175 billion) in revenue per year.

Many countries have rates above 15% on paper, but with so many exemptions that companies end up paying much less. Most of these exemptions would be closed, so companies would end up having to pay at least 15%.

The CAE, a body responsible for providing economic analysis to the French government, calculated that Paris would likely get an additional six billion euros in tax revenue per year.

Germany would probably receive 8.3 billion euros and the United States almost 15 billion.

China would also likely benefit, as it should be able to continue to offer some tax incentives to support business development.

However, details on any remaining tax incentives are yet to be finalized.

Tax havens to lose

Countries that set their tax rates low in order to attract business, including tax havens that charge little or no tax, stand to lose the most.

While Barbados and St. Vincent and the Grenadines balked at the deal, other tax havens like Panama, Bermuda and the British Virgin Islands signed on nonetheless.

“They realized they didn’t have the ability to block an international deal and calculated it was their duty to be cooperative,” said Nicolas Veron, an economist at the Peterson Institute for International Economics in Washington and D.C. the Breugel Institute in Brussels. .

“Countries that have attracted shell companies for years will suffer from the reform and will have to find other development strategies,” said Farid Toubal, specialist in the subject at Paris Dauphine University.

European countries worried

European countries like Ireland, which lured Apple and Google with the ability to cut effective tax rates to virtually nothing, would see a revenue windfall if they joined the reform.

But that is only if these companies stay and continue to make their profits there.

Countries like the Netherlands, Luxembourg and Switzerland are in a similar boat.

“Beyond the impact on public finances, it is clear that the reform process could affect the economies and employment of these countries, especially if multinationals relocate profits and investments accordingly,” said economist Ricardo Amaro of Oxford Economics.

In 2018, about one-third of U.S. multinationals’ profits were made in the Netherlands, Ireland and Luxembourg, although those countries only accounted for 5% of their sales, Amaro noted.

But Ireland, which has invested heavily in IT infrastructure and education in recent years, and which has become a center for the pharmaceutical industry, would likely retain many multinationals even if it raised prices.

“Of course the fictitious companies will leave, but the production base will remain because Ireland has other assets, they speak English, it is part of the huge European market, etc.,” said Toubal from Paris Dauphine University. .

Exemptions for emerging countries

Non-governmental groups that analyze tax avoidance strategies used by multinationals, such as Oxfam, have criticized the OECD-brokered deal for letting rich countries keep the bulk of the extra tax revenue.

“The world’s poorest countries will recover less than 3%, despite being home to more than a third of the world’s population,” Gabriela Bucher, executive director of Oxfam International, said in a statement.

But the draft agreement that emerged in early July contains some sweeteners for emerging countries.

They will benefit from measures that redistribute part of the tax revenue to the countries where the profits are generated.

Developing countries will also be able to maintain certain tax incentives to attract manufacturing industry, although the details have yet to be agreed.

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