Is a global minimum corporate tax rate actually possible?

Joe Biden’s Treasury secretary, Janet Yellen, made a striking proposal this week. Yellen, who is also a former head of the US central bank, said it would be desirable if there were a “global minimum corporate tax rate”.

“We are working with G20 nations to agree to a global minimum corporate tax rate that can stop the race to the bottom,” she said in a speech to the Chicago Council on Global Affairs on Monday.

“Together we can use a global minimum tax to make sure the global economy thrives based on a more level playing field in the taxation of multinational corporations, and spurs innovation, growth, and prosperity.”

It’s a striking proposal not only because it would represent an unprecedented level of international coordination over tax policy but also because it would reverse a two decade-long trend of countries competing to attract foreign investment by multinational companies by reducing their headline corporation tax rates.

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At the turn of the millennium the average corporate tax rate among OECD countries was 32 per cent. By last year it had declined to 22 per cent.

The average rate among G20 countries has fallen from 35 per cent to 27 per cent over that period.

Yet despite the tumbling rates, the climate has changed in some countries recent years, amid rising public anger towards multinationals who have been (via legal but questionable accounting techniques) shifting their registered profits between different national jurisdictions to reduce their tax bills.

Both the Biden administration in the US and the UK government have unveiled plans to hike their own headline corporate tax rates considerably over the coming years.

But while one can see how it would be desirable for those countries to have a new global minimum rate, what incentive is there for a country such as Ireland, which has long used its ultra-low headline corporation tax rate of 12.5 per cent to lure multinationals to establish operations there, to agree to such a standard?

So is Yellen’s call for a global minimum rate a realistic prospect, or just wishful thinking destined to fail when faced with international disagreement?

The first thing to note is that we have, in fact, already been witnessing global cooperation to curtail multinational corporate tax avoidance in recent years.

The OECD and the G20 have been working on a new set of standards known as the “Base Erosion and Profit Shifting” (BEPS) initiative to reform the behaviour of large firms in this regard.

Under the pillar 1 of BEPS, dozens of countries and jurisdictions have agreed to implement a range of specific measures to ensure that the tax due from multinationals better reflects their profitable commercial operations in any given country.

And under pillar 2, which is still under consultation, states would top up corporate tax on a firm if it was going to pay anything lower than a global minimum rate as result of transferring funds to a subsidiary abroad.

Yellen’s call for a minimum corporate tax rate is actually a description of that pillar 2 international tax levelling up. And anti-corporate tax avoidance campaigners hope OECD and the G20 will agree something along these lines in June.

Yet given some states, not least Ireland, view a low headline corporation tax rate as a source of national competitive advantage, what incentive would they have to agree to such a system?

The pillar 2 OECD proposals sketch out a mechanism to penalise countries that refuse to take part, enabling states to unilaterally impose taxes on financial transfers across borders.

“A good pillar 2 outcome would go a long way to stop profit shifting, not by making it harder but by making it much less rewarding since multinationals would, in theory, end up being taxed at the minimum rate even if they managed to shift the profits to a zero-rate jurisdiction,” says Alex Cobham of the Tax Justice Network.

But Professor Michael Devereux, a veteran tax expert at the Said Business School, is sceptical about whether such a system would be effective in practice.

“Even if everybody does sign up to it in the short run there’s always an incentive for some future government to renege on that,” he says.

Devereux prefers, instead, a more comprehensively unilateral approach by states to the problem. Under his proposals, individual states would simply tax a multinational company’s profits generated within their territory (based on local sales after adjusting for local investments made and other domestic costs incurred).

“That’s easier because it’s happening in your own country ­[rather] than asking countries to tax income arising somewhere else in the world,” he says.

In other words, it would not be hostage to some uncooperative states refusing to sign up, either now or in the future.

Nevertheless, Devereux accepts that with the Biden administration now pushing for global action the chances of success for the multilateral OECD approach are higher.

“The US is really the most important player, it has a lot of leverage,” he says.

“If Yellen goes into the OECD and says we’re going to provide our full support there’s a fair chance of it happening in a way that no one else could do.”

Cobham of the Tax Justice Network is also encouraged by Yellen’s words this week and by the Biden administration’s push for a minimum rate of 21 per cent, rather than the OECD secretariat’s own 12.5 per cent proposal.

“By being so explicit and high profile this will really help build the momentum,” he says.

“The best guess is that the OECD will deliver something in the summer but it will most likely involve a coalition of the willing moving ahead with a minimum tax that may not be highly effective but the shift, in terms of leading countries committing to end the race to the bottom, is going to be powerful whatever the immediate technical detail.”

Nothing can be taken for granted in such an inherently complex and nationally sensitive area of global policy making but it’s not impossible that the coming months will be looked back on as a crucial period in the protracted and democratically corrosive wrestling match between nation states and tax-avoiding multinational companies.