From Evasion to Equity: The Dawn of a New Era in Global Taxation
- From David Kläffling
- Reading duration 2 min
The recently introduced 15% minimum corporate tax by several OECD countries rate has also consequences for wealth inequality and fiscal fairness.
Global tax evasion and, more broadly, tax avoidance are highly concentrated among the rich. This not only undermines the social contract but also significantly contributes to widening wealth inequality. Furthermore, the surge in tax avoidance has often been viewed as an unavoidable consequence of globalisation, offering multinational firms and wealthy individuals worldwide new opportunities to 'economise' on taxes.
The recent introduction of a global minimum corporate tax rate of 15% by several OECD countries challenges the notion that tax avoidance is an inevitable byproduct of globalisation. Coordinated by the OECD, these reforms are anticipated to increase annual tax revenue worldwide by up to 9%, amounting to an estimated $220 billion.
The initial jurisdictions embracing the global minimum tax comprise the European Union, the United Kingdom, Norway, Australia, South Korea, Japan, and Canada. The regulations will apply to multinational companies with an annual turnover surpassing €750 million. Noteworthy is the participation of countries traditionally seen as tax havens for multinational corporations, including Ireland, Luxembourg, the Netherlands, Switzerland, and Barbados. For example, Barbados previously maintained a corporate tax rate as low as 5.5%, underscoring the significant impact of this global initiative in promoting fiscal fairness and curtailing tax avoidance practices.
As reported in a recent article, the agreement consists of two pillars:
The first aims to get multinational companies to pay more tax where they do business, while the second establishes a global minimum corporate tax rate. The rules mean that once some nations introduce the global rate, other countries have an incentive to do so because otherwise, participating nations can collect tax at their expense. “Pillar two only needs a critical mass of countries to implement it,” said Pascal Saint-Amans, the OECD’s former tax chief. “Nobody has found a silver bullet where you can avoid it.” While much depends on implementation and the response of multinational companies, preliminary analysis suggests participating countries that host significant low-taxed corporate profits will be the early winners.
There will still be tax competition, increasingly via subsidies, and a number of exemptions and special regulations could weaken the impact of the reforms. Nevertheless, the initiative shows that challenges such as the "race to the bottom", which were previously seen as unavoidable, can be mitigated through international cooperation.