Finance ministers from the G7 could not resist hyperbole when they committed in early June to shake up the way multinationals are taxed in an ever more digital world. Rishi Sunak, who chaired the finance summit, called their agreement “truly historic” and the reforms “seismic.” But stock markets scarcely quaked in their boots, even though the measures could potentially add around $150bn a year to global corporate tax revenues.
The plan, which won support from 130 countries at the start of July, has two parts. One will introduce a new approach to taxing the world’s largest and most profitable multinationals, including America’s tech titans such as Facebook and Google. At least a fifth of profits (above a basic 10 per cent margin) will become subject to tax by the countries where they make their sales. As part of the bargain, states such as Britain that have introduced digital services taxes will have to abolish them. The second part of the plan is to set a global minimum corporate tax rate of at least 15 per cent. If a multinational’s subsidiaries are in places where rates are lower, the parent company’s tax authority can charge a top-up levy to hit that minimum total rate.
One reason for the insouciance of investors may be scepticism about how much of the deal will survive the domestic legislation needed to turn intentions into practice. Implementation will in any event be a prolonged process. Moreover, the reforms will make international corporate taxation even more complicated—and complexity often helps the multinationals confound the taxman. The deal also pulls its punches. The genuine innovation is the plan for the world’s biggest multinationals, which breaches the convention that profits are taxed where companies are based and produce their goods rather than where they sell. However, the proposed change is on a modest scale, such that one estimate (from TaxWatch) is that the Treasury would get less revenue under the new arrangement than from its digital services tax. As for a global minimum tax of 15 per cent, that is not much higher than Ireland’s vaunted low rate of 12.5 per cent.
But even with punchier proposals, investors may remain unfazed. Companies might pay corporate tax in the first instance, but ultimately it is individuals who pay taxes. Shareholders won’t necessarily end up footing the bill. Businesses can respond by pushing up prices or lowering wages, passing some or all of the new tax on to consumers and/or workers.
Studies of corporate tax in open economies suggest that a large chunk is ultimately borne by workers. But for the big global companies—such as America’s tech giants—that are targeted by the reforms, it seems more likely that an increase in their tax bills will be passed through to consumers.
And to the extent that shareholders do lose out, the deal provides compensations. It offers a way out of the dispute between America and six countries that have introduced digital sales taxes, which could otherwise end with the US triggering damaging retaliatory tariffs. At least some of the extra revenue raised may boost public infrastructure and with it, productivity growth. Most important, the Swiss-cheese regime of international corporate tax brings market capitalism into disrepute and invites a political backlash. The reforms offer a possible way to end the damaging race to the bottom.
