rodrik185_Hannah McKay-PoolGetty Images_g7ukus

Economics

The G7 Tax Clampdown and the End of Hyper-Globalization

Jun 7, 2021 Dani Rodrik

The G7 agreement on taxation of global corporations still needs formal approval from a wider set of countries, and there remain many details to be worked out for it to be effective. Nonetheless, it would not be farfetched to describe the deal as historic.

CAMBRIDGE – On June 5, the world’s leading economies announced an agreement that will bolster their ability to raise taxes on global corporations. The agreement still needs formal approval from a wider set of countries, and there remain many details to be worked out for it to be effective. Nonetheless, it would not be farfetched to describe the deal as historic.

The G7 agreement has two planks. First, it proposes a global minimum tax of 15% on the largest corporations. Second, a portion of these corporations’ global profits will be clawed back to countries where they do business, regardless of the location of their physical headquarters.

These objectives are as clear an indication as any that hyper-globalization’s rules – under which countries must compete to offer global corporations ever-sweeter deals – are being re-written. Until very recently, it was opposition by the United States that stalled global tax harmonization. Now, by contrast, it was President Joe Biden’s administration that pushed the deal.

To continue reading, register now.

Subscribe now for unlimited access to everything PS has to offer.

As a registered user, you can enjoy more PS content every month – for free.

Already have an account? Log in

Subscribe to PS Digital

Access every new PS commentary, our entire On Point suite of subscriber-exclusive content – including Longer Reads, Insider Interviews, Big Picture/Big Question, and Say More – and the full PS archive.

Subscribe Now

new comment has been posted. new comments have been posted.

0 Comments on this paragraph, 4 Comments on this article

Joe Ryan Jun 10, 2021

Prof. Rodrik doesn't mention what the G-7 said about digital services taxes, which might have mitigated his enthusiasm for the reforms that are afoot — which are, after all, still vaporware.
A new reply to this comment has been posted.
Ray Bednarcik Jr Jun 9, 2021

It's not about taxes but Government control and the elimination of international competition. Money is fungible which has few barriers of movement so you can be just about anywhere to manage or run your business. The US, EU and industrialized countries want a planned economy where they decide what a company gets to keep in profits. If you can't move to a lower taxed country the bloated and inefficient countries will continue to raise their taxes. The same problem is happening in the US. High tax states like NY, and California are experiencing a massive movement of business to lower tax states. The states want all kinds of barriers to keep businesses in their states from moving. The solution is remain competitive and lower your taxes...
A new reply to this comment has been posted.
j. von Hettlingen Jun 7, 2021

Dani Rodrik says the finance ministers of the G7 grop of wealthy nations have agreed on a landmark deal last week, that will enable them to tackle tax abuses by global corporations. Although the agreement “still needs formal approval from a wider set of countries, and there remain many details to be worked out for it to be effective…. it would not be farfetched to describe the deal as historic.” For the first time it is a step towards a fairer global tax system, establishing a minimum global corporation tax.
The author says the agreement “has two planks. First, it proposes a global minimum tax of 15% on the largest corporations. Second, a portion of these corporations’ global profits will be clawed back to countries where they do business, regardless of the location of their physical headquarters.” A global minimum corporation tax of 15% will make it harder for small countries to “compete” among themselves, offering global corporations “ever-sweeter deals,” while triggering what Janet Yellen calls “a 30-year race to the bottom on corporate tax rates.”
The deal would put real pressure on the world’s tax havens to follow suit. Countries like Moldova (12%), Paraguay (10%), and Uzbekistan (7.5%) “have set their rates particularly low to attract foreign investors, whom they see as a source of quality jobs and advanced technologies.” The deal would prevent multinational businesses from shifting their profits across the globe, dismantling their footloose, beggar-thy-neighbour version of capitalism, which has deprived treasuries of hundreds of billions in tax revenues.
The second part of the deal is intended to reform the tax framework to more fairly reflect where tech companies such as Amazon, Google and Facebook do business and make their money, as well as where their headquarters are. The economic realities of the digital age mean that the tech titans have been getting away with paying far too little for far too long. “Under the agreement, “the largest multinational companies with profit margins of at least 10% would have to allocate 20% of their global profits to countries where they sell their products and services.”
Apart from “administrative feasibility,” the author says the new agreement “might face two opposing objections. Tax-justice advocates will criticize the global minimum of 15% as too low, while many developing countries will decry the global minimum as an unwarranted restriction that will impede their ability to attract investment. The deal struck by the G7 appears to reflect both sets of concerns: the low threshold could assuage developing countries’ concerns, while the global apportionment of profits will enable high-tax jurisdictions to recoup some of their lost revenues.”
The author says, the US and high-tax European countries "might complain about losing tax revenues when poorer countries maintain lower rates. But there is nothing to prevent such countries from taxing their home companies unilaterally at higher rates: they can simply apply the tax to domestic companies’ global profits, apportioned by the share of revenues they derive from the domestic market… each country can do this on its own, without global harmonization or even coordination….a global regime that enhances the ability of individual countries to design and administer their own tax systems, in light of their own needs and preferences, is likely to prove more robust and durable.”
Initially the US prefers “a global minimum tax set at 21%....in addition to national apportionment,” because it “does not want to put its corporations at a disadvantage relative to other countries’ firms by taxing them at significantly higher rates. But this competitive motive is no different from poor countries’ desire to attract investment. If the US prevails and the latter lose out, it will be because of relative power, not economic logic….The eventual compromise of 15% may be sufficiently low to minimize tensions with poorer countries and to allow the latter to sign on.”
In order to make up the shortfall, the US must ensure that the “second plank of apportionment is strengthened.” The compromise of a minimum of 15% comes “at the cost of lower tax revenues,” when debts piled up by governments during the Covid pandemic, combined with a boom in profits for big tech companies during lockdowns. Biden is determined to access a greater stream of corporate revenue to help fund economic recovery and his $2.3tn American Jobs Plan. He must seize the momentum now that there is a global consensus for making global corporations pay their fair share of taxes.
A new reply to this comment has been posted.

https://prosyn.org/PKqORN0

The G7 Tax Clampdown and the End of Hyper-Globalization

Subscribe to PS Digital

New Comment

Contact us

Log in/Register

The G7 Tax Clampdown and the End of Hyper-Globalization

Subscribe to PS Digital

Edit Newsletter Preferences

Set up Notification