In April of this year, US President Joe Biden proposed a reform of the global tax system that would set a minimum global corporate tax of 15 per cent.
Agreed upon by the Group of Seven (G7) nations in June, the G20 in July, and now backed by 131 countries worldwide, the potential agreement will be the biggest overhaul of the international tax system in decades. All going well, the new tax rules will be legally binding worldwide by the end of 2023.
The idea of a global taxation system, however, is not new. Some of the early ideas, which surfaced following World War II, were aimed at funding the United Nations or repairing war-torn economies. By the 1960s, the discussion had shifted toward international taxation as a form of multilateral aid for developing nations.
In 1980, the discussion surrounding global taxation came to a head due to a report published by the Independent Commission on International Development Issues, known as the Brandt Commission. The report, entitled ‘North-South: A Program for Survival’, called for “universal taxation” – the collection of revenue from rich countries which would be redistributed to poor countries.
Unfortunately, the timing was not right. Soon after the release of the report, President Ronald Reagan came into power in the US. His tax-cutting agenda quickly shut down the possibility of a global tax regime, and since then, tax regimes have been caught in a race to the bottom.
“Today, fewer than 20 countries have corporate tax rates over 30 percent, in comparison to more than double that number at the turn of the century.”
Between 2000 and 2018, 76 countries cut corporate taxes, while only 18 kept them the same or increased them. Today, fewer than 20 countries have corporate tax rates over 30 percent, in comparison to more than double that number at the turn of the century.
Now, in the wake of a global pandemic, President Biden has seized the opportunity for serious reform. Following the G7 negotiations, Janet Yellen, US Treasury Secretary, announced that “The G-7 economies came together to agree the post-pandemic world must be fairer, especially with regard to international taxation.”
But will it really be fairer?
The proposed global tax reform asks nations to agree to a minimum corporate tax rate of 15 per cent, with an aim to reduce the incentive for large multinational companies to shift their profits to the so-called ‘tax havens’ – Bermuda, the Cayman Islands, Luxembourg, the Netherlands, Singapore, Switzerland, and, of course, Ireland.
These countries all have one thing in common – they are small. And because they are so small, these countries have to use competitive tax rates to survive in the globalised economy, because they are too tiny for competitive, large-scale production of goods. On top of this, they do not have many natural resources.
The natural course of action, in this case, is to prioritise attracting investment over collecting tax. So, while on the face of it, it seems unfair that huge multinationals can declare their profits offshore to avoid paying taxes, for Ireland and the other tax havens, this strategy is a means of survival in a globalised system not designed in their favour.
In fact, the term ‘tax haven’ may not be an entirely accurate description.
According to popular Irish economist and broadcaster, David McWilliams, at least, this label is misleading. It implies “a place where companies have a fictitious presence with little or no real impact in the greater society,” he writes.
That is certainly not the case here in Ireland, where last year alone, €15.1 billion in wages was generated by the multinational sector, and 20,000 new jobs were created, thanks to a low corporate tax of 12.5 per cent.
As a result, Ireland has refused to join the G7 and G20 in backing proposals for a restructuring of corporate taxation, warning that it may cost the exchequer over €2 billion a year.
“Whatever the effect of global tax reform on Ireland, it pales in comparison to the possible implications for the developing world.”
However, it may not all be bad news, as some commentators highlight the possible opportunities of increased taxes in Ireland – the ability to invest in housing, health and education.
Whatever the effect of global tax reform on Ireland, it pales in comparison to the possible implications for the developing world. Even if the implications for Ireland are as bad as we expect, the country has the support of the EU and a highly educated workforce to cushion the blow.
The ongoing pandemic is deepening global inequalities, as the health systems and economies of developing countries struggle to keep their citizens safe, while rich countries keep vaccine production secrets to themselves. While we in the West begin our recovery, pandemic-related poverty is on the rise in the rest of the world.
In response to the proposed reform, Gabriela Bucher, Executive Director of Oxfam International said in a statement:
“Rich countries are forcing developing countries to choose between a raw deal or no deal. It is just another form of economic colonialism. This is not an ‘historic’ deal ―it is history repeating itself. Those who shamelessly rigged the global tax system to their benefit over a century ago have again ring-fenced the game for themselves.”
Only a redistributive global tax could attempt to tackle the public health emergency, climate crisis and widespread poverty of today.
A tax reform that would actually benefit the world’s poor would recover billions in underpaid corporate tax for all countries – but the rate of 15 per cent does little to end tax competition. Only 3 per cent of taxes recovered will go to the world’s poorest countries, while over two-thirds will go to the G7 and EU.
Instead, the proposed reform targets small rich countries (like Ireland) for the benefit of big rich countries (like the US).
As Bucher concluded: “It is bad news for tax havens, but will fail to levy funds developing countries desperately need to save lives and propel sustainable economic recovery from COVID-19.”
Featured photo by Gayatri Malhotra
This article was supported by: STAND Opinion Editor Olivia + Programme Assistant Alex