The G7 Finance Ministers’ Communique from this past weekend included the following discussion of international tax policy:
“We strongly support the efforts underway through the G20/OECD Inclusive Framework to address the tax challenges arising from globalisation and the digitalisation of the economy and to adopt a global minimum tax. We commit to reaching an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises. We will provide for appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes, and other relevant similar measures, on all companies. We also commit to a global minimum tax of at least 15% on a country by country basis. We agree on the importance of progressing agreement in parallel on both Pillars and look forward to reaching an agreement at the July meeting of G20 Finance Ministers and Central Bank Governors.”
Here are a few comments on this paragraph:
1) The proposed allocation to market countries raises a few questions. For one, what is the relevant “profit”? By definition, this term requires comparing specified gross revenues to specified expenses and other deductible outlays. Are these to be determined by using standard income tax source rules? I would think not, as this would make the proposed allocation wildly ineffective. For example, the UK may consider itself the market country with respect to the revenues that Facebook earns from the use of its digital platform by UK residents. This probably has more in common with how gross revenues are defined in its digital services tax (DST) than with anything in its income tax.
2) Note also that this rule will ostensibly apply to all of the “largest and most profitable multinational enterprises,” without apparent limitation to those that are subject to DSTs. And it is also supposed to apply in countries that don’t have DSTs. Moreover, even those that do have DSTs may define relevant revenues (as well as companies subject to the DST) quite distinctively.
3) Next and relatedly, what about the outlay/deduction side? This is needed not only to define profit, but also to determine the profit that exceeds a 10% margin.
4) To identify the “largest and most profitable multinational enterprises,” one needs a measure of global income. How is this to be computed?
5) What if a country wants to retain its DST? The G7 statement says only that it will “provide for appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes, and other relevant similar measures, on all companies.”
6) Obviously, the 15% global minimum tax has lots of design work ahead (to put it mildly). It is presumably to be applied by the multinationals’ residence countries – requiring a uniform definition of corporate residence? – and presumably with (100%?) foreign tax credits for source-based taxes. While the foreign tax credits would make it a residual tax, applying only insofar as the source-based taxes don’t get there, this might leave plenty of scope for it, if source countries restrict themselves to 20% of profits above the 10% level (especially given the likelihood that there will be plenty of flex in how those profits are being defined).
7) How are countries are likely to respond in practice? While there is certainly room for pessimism, I don’t think the standard view of how countries pursue their self-interest (like profit-seeking individuals in a simple neoclassical model) necessarily applies very strongly. Countries are collective entities that make political choices based on multiple actors who themselves may have narrow, not national, goals in mind. These may also be symbolic goals reflecting internal political dynamics. Consider the “self-interest” of the United States. Even in academic debate among knowledgeable people who are debating things in good faith, there is absolutely no consensus as to what is in the national self-interest in the international tax policy realm. Indeed, even only counting people whom I consider good personal friends, there is extreme dissensus.
8) When we start thinking in terms of a Biden Administration versus a Trump Administration, things get even less determinate, insofar as predicting the settings of the national policymaking compass is concerned. Even if we accept both administrations as trying to act in what they deem to be the national interest (which I don’t think accurately describes the corrupt and treasonous Trump White House), they evidently define it radically differently. Suppose that all of the G7 countries had either (a) center-left to progressive regimes, or alternatively (b) right-wing “nationalist,” plutocratic, pseudo-populist regimes. These two scenarios would lead to very different sets of policies being followed.