For almost a century, international taxation was a Byzantine and disturbing world in which few of them would dare to venture. It took the massive upheaval of the 2008 global financial crisis to turn that around.
In the absence of modern tax regulations, governments in desperate need of revenue realized how much their sovereignty had been eroded. A race to the bottom had set in, with competition between beggars and neighbors driving down corporate tax rates and lower tax bases.
We have come a long way since then. President Joe Biden’s announcement of an ambitious tax plan for the United States has given new impetus to a ten-year effort – led by the G20, with support from the Organization for Economic Co-operation and Development ( OECD) – to restore fiscal sovereignty. This is a unique opportunity to completely overhaul the international tax system, to offer more certainty to businesses and everyone is paying their fair share.
Why is a global tax overhaul needed? The economy has changed dramatically over the past 40 years. Brick-and-mortar companies have given way to a digital economy driven by intangibles, such as copyrights and patents, which are extremely mobile and devilishly slippery for the tax expert working within a system designed for traditional tangible goods. The creation of value is concentrated within a few companies, clearly the winners of globalization. Many of the larger and more successful businesses often pay the lowest corporate income tax. The feeling of injustice – for citizens and governments alike – has become untenable.
The global financial crisis has been a wake-up call for governments. This prompted them to work together to fight illegal tax evasion by individuals and aggressive tax evasion by multinationals. The OECD / G20 Base Erosion and Profit Shifting (Beps) initiative has helped close loopholes and modernize the rules. Thanks to the automatic exchange of information system developed by the OECD and endorsed by the G20, we have started to reverse the trend. Since 2009, € 107 billion (£ 93 billion) in additional tax revenue has been identified. Countries have now exchanged information on more than 84 million offshore financial accounts, worth € 10 billion, and additional income will flow from it.
Today we are at a crossroads: moving forward with more efforts in tax cooperation, or facing the risk that countries take unilateral action. This would not only lead to increased fiscal uncertainty, but could spark a tax-driven trade war – the last thing a global economy ravaged by the Covid pandemic needs.
Since the implementation of the Beps action plan in 2015, the 139 members of the OECD / G20 Inclusive Framework have been working on a consensual solution to “meet the fiscal challenges of the digitization of the economy”. But progress has been too slow. The new American momentum is exactly what it took to bring this negotiation to a successful conclusion by mid-2021.
The solution proposed by the OECD is twofold. First, update the rules, enable countries to better share tax rights on the winners of globalization, especially those who have benefited from the digitization of the economy. Our plan is to establish new rules that will allow a foreign company to be taxed in the country where it makes its money, even if that company is not physically present there. We also advocate a more equitable distribution of these benefits, so that countries that are markets for multinationals also benefit. After years of hesitation between countries on which companies should be in a solution, we hope that a consensus will emerge soon, focusing on the most profitable and largest companies.
The biggest change, however, stems from the US decision to call the weather a “race to the bottom.” The Beps project put forward the concept of a minimum tax on the profits of multinationals. Changes to the US tax system in 2017 introduced the principle of a minimum tax on the profits of US multinationals left overseas, at an average effective rate of 10.5%. Biden’s plan is to tighten this rule significantly, lower the minimum rate to 21% and advocate for a global move in this direction to limit tax competition between countries.
Agreement on these two pillars would restore confidence in the global tax system. This will require countries to agree on the status quo and the withdrawal of unilateral measures.
As the end of my term as Secretary General approaches, I still hope that we will learn from the previous crisis in order to move forward better. The conclusion of a global tax agreement in 2021 would be the culmination of many years of hard work and would mark a new era for better regulation of globalization.