why Janet Yellen’s call for a global minimum rate is a bad move

United States Treasury Secretary Janet Yellen is calling on governments around the world to support the United States in implementing a global minimum corporate tax rate. She did not specify a rate, but it comes at a time when the US government is trying to raise the country’s internal corporate tax rate from 21% to 28%.

Yellen said imposing a global minimum would “ensure the prosperity of the global economy based on a fairer level playing field in the taxation of multinational corporations”, and that it would spur “innovation, growth and prosperity”.

The new US administration has already tried to reach an international agreement on a digital tax for online giants such as Amazon and Facebook, pushing for the OECD to reach an agreement by summer. The Economist estimates that Silicon Valley’s ‘big five’ have paid just US$220bn (£159bn) in cash taxes over the past decade, which is just 16% of their pre-tax profits.

Yet Yellen’s call for a global minimum corporate tax goes far beyond that. And in my opinion, this is a bad idea: it would disadvantage developing countries and is probably not feasible anyway.

A race to the bottom?

Yellen argues that a global minimum rate will end a “30-year race to the bottom” – but global practice points to a more mixed picture. In 2020, nine countries on five continents reduced their corporate tax rates from one (Togo) to five percentage points (Greenland). Within the OECD, several countries are planning to cut their rates over the next fiscal year or two: France is dropping from 32% to 25%, while Sweden is dropping from 21% to 20%. The Netherlands was also planning a reduction, but has since changed its mind.

However, many other countries have kept their rates stable for many years. Nigeria’s rate remained stable at 30%, while Brazil’s remained unchanged at 34%. China’s rate has been 25% for more than a decade (but 15% for sectors the government is trying to encourage, like some tech companies). South Africa’s rate has also been 28% for almost a decade, although it drops to 27% in 2022.

Each rate is subject to drivers specific to the country in question and its economy, but none of these countries is in a “race to the bottom”. Nor do they require an overall minimum rate. There has been much more interest in a digital corporate tax, with some companies like India, the Czech Republic, France and Turkey already introducing a levy.

Threat to flexibility

In both developing and developed countries, multinational corporations are a source of foreign direct investment, which makes them attractive to governments. These corporations hire workers and indirectly create many more jobs, from using local contractors to creating demand for consumer goods through the wages they pay.

Some countries have used their freedom to set corporate tax rates to attract such companies. There are examples of low corporate tax regimes around the world, from Ireland (12.5%) to Moldova (12%), from Paraguay (10%) to Uzbekistan (7.5%) . In a world where there are huge disparities in the income levels of different countries, a global minimum corporate tax rate could crowd out those that are not particularly attractive, but for the fact that they can offer higher rates low.

For some companies, it will also increase the cost of international business. Take the example of an American company present in Ireland. Assuming the overall minimum rate is set at 20%: such a company would have to pay 7.5 percentage points more corporation tax on trading in Ireland than it does at present. Not only does this potentially make Ireland less attractive, but it means the costs will be passed on – whether to the company’s suppliers or its customers or otherwise.

More generally, a global minimum rate would remove the flexibility for different nations to pursue policies that suit them best. Take COVID-19, for example. With data from the IMF and World Bank suggesting that developing countries may experience a longer economic hangover than their developed counterparts, Ghana recently introduced a 30% tax rebate for businesses in sectors such as travel, tourism and hospitality for the remainder of 2021.

This is comparable to the UK’s recent announcement that it was postponing a planned corporate tax increase for several years to encourage business spending. Under a global regime of minimum corporate tax rates, will independent nation states be able to propose such initiatives?

Finally, an overall minimum rate will not end creative accounting. Each country’s tax code will always have its own set of complicated exceptions and exemptions, and companies will always pay generously for specialist advisers to help them make the most of them. A global minimum rate will also do nothing to combat tax evasion, which was recently estimated to cost taxpayers almost half a trillion US dollars a year.

In short, Yellen’s proposal is not a magic bullet and targets a problem that is not what it seems. It’s a battle not worth winning and will cause a lot of collateral damage before it’s over.