This is a guest post from Sol Picciotto, Coordinator of the BEPS Monitoring Group, emeritus professor of law at the University of Lancaster in the UK, and one of the Tax Justice Network’s senior advisers. Sol is also a global leader in international tax law, and his work has for decades informed the push for reforms to ensure a more effective and progressive treatment of multinational companies. Here, he presents our new proposal, the METR, which cuts through the complexity and uncertainty of the OECD proposal for a global minimum tax and would deliver a clear end to the race to the bottom.
There is an unprecedented opportunity in the next few weeks to reach international agreement on measures that could end the race to the bottom in corporate taxation. The new US administration has put its weight behind efforts to agree a strong and effective minimum tax on multinational enterprises (MNEs). The Biden administration’s own Tax Plan would transform the measures already introduced by Trump in 2017, giving them real teeth, and this should spur on other states. But, as always, devils lie in the details.
The aim is to bring MNEs’ profits and the taxes they pay in line with where they have real activities, as mandated by the Tax Declaration issued by the G20 leaders back in 2013. Unfortunately, negotiations since then through the project on base erosion and profit shifting (BEPS) hosted by the Organisation for Economic Cooperation and Development (OECD) have resulted only in a patch up of existing rules. The main gain was the creation of a system of country-by-country reporting (called for since 2003 by tax justice campaigners), but this has been limited to only the largest MNEs, and the reports are not made public. However, the aggregate data that have been published show that there has been little decline in profit-shifting, and suggest annual global losses from corporate tax avoidance at around $200 billion.
Enormous pressure from public opinion has pushed the OECD into continuing efforts, but they have focused mainly on highly digitalised MNEs. US opposition to targeting these mainly US-based companies has resulted in a slight widening of the scope, to include some brand-name consumer products firms. The latest proposals at last do envisage a new approach, allocating at least a small part of the global profits of MNEs in accordance with their economic reality as unitary firms by applying a formulaic method. However, this will apply to only a handful, perhaps as few as a couple of hundred, of the largest MNEs. It would leave untouched the current dysfunctional rules that treat affiliates of MNEs as separate entities and spur them to book paper profits in low-tax countries.
More hopeful is the proposal for a global minimum tax. This would not require global agreement, indeed the US has shown that even unilateral measures are possible, so it could be introduced by a group of willing countries. Such a coalition could side-step resistance and sabotage by countries that have been captured by the tax avoidance industry, and break the vicious cycle of beggar-thy-neighbour tax competition.
The Biden proposals point the way forward by greatly strengthening two central defensive walls against profit shifting. First, the GILTI (global intangible low-taxed income) tax, which applies to low-taxed foreign profits of US-based MNEs, would apply on a per country basis, and the rate would double from 10.5% to 21%. Secondly, the complementary measure that applies to profits shifted out of the US by foreign based MNEs, the BEAT (base erosion anti-abuse tax) will be replaced by the SHIELD (Stopping Harmful Inversions and Ending Low-tax Developments) tax. The two measures would operate in tandem, using the same methodology to specify the low effective tax rate, and aim to be coordinated with other countries if possible.
Most of the building blocks for an international agreement have been provided in the blueprint published October 2020 by the OECD, but the overall design has significant flaws. Like the US measures, the OECD’s proposed GLOBE (global anti-base-erosion) tax has two components, one for the MNE home country to target low-taxed foreign profits, and the other for host countries to block shifting of profits to low-tax jurisdictions. However, it proposes to give priority to MNE home countries to tax these undertaxed profits. Host country measures would only be a fall-back, even though they are the source of these undertaxed profits. The blueprint recognises that this would be grossly unfair, particularly to smaller and poorer countries that are mainly or only hosts to MNEs. So, a third measure is proposed, but this would require changes to tax treaties, effectively handing a veto to countries that have designed their treaties and other measures to enable sheltering of low-taxed income.
To provide a fairer and more effective solution, a revised version of the GLOBE has been put forward by a group of researchers variously affiliated to Tax Justice Network, the BEPS Monitoring Group, the Independent Commission for the Reform of International Corporate Taxation (ICRICT) and Charles University’s CORPTAX research group: a minimum effective tax rate (METR) for multinationals. This would combine the two elements of the GLOBE into a single formulary apportionment rule (FAR), that could be applied by all countries to both inward and outward investment alike.
Dispensing with the need for priority rules would ensure fairness between countries, and non-discrimination between home-based and foreign-based MNEs, as well as greatly simplifying administration of the measure. The METR would allocate profits that have been taxed below the agreed minimum effective tax rate among countries, using factors reflecting the MNE’s real presence in each country (employees, physical assets and sales to customers). Each such country could apply its own tax rate to these apportioned undertaxed profits, whether it is above or below the agreed minimum rate.
This would of course not provide a complete solution. Although the METR could go ahead without the need for a treaty, some important changes should be made to treaties as soon as possible to facilitate its application. Countries could still compete to attract investment by offering low tax rates, but it would be to attract real activities and not paper profits. The METR’s formulary global minimum tax should point the way forward to a more comprehensive reform of international tax rules based on unitary taxation of MNEs and formulary apportionment.
The METR’s reallocation of undertaxed profits should be widely welcomed, as our estimates suggest that almost all countries would benefit (for the full data see here). As the table shows, compared to the GLOBE the METR would bring greater revenues to countries with a per capita GDP below US$40,000. This results from both its fair apportionment method, and from allowing each country to apply its standard tax rate to its apportioned undertaxed profits.
This would level the playing field between MNEs and domestic companies, and create an incentive for countries with low rates to increase them. Hence, it is important to set a suitable minimum rate. This should be no lower than the US proposal of 21%, and preferably 25% or higher as proposed by the ICRICT. The METR should also apply to all MNEs, subject only to a low threshold of perhaps €50m to exclude small and medium enterprises.
Tax revenue gains by country groups from the METR and the GLOBE (at a 25% minimum rate)
|GDP per capita (USD)
(METR vs GLOBE)
NB. This table was initially posted with erroneous data in the METR and GLOBE columns. This correction is posted at 1615 BST, 16.4.21, with thanks to Tommaso Faccio for spotting the error.
For further details see:
Cobham A, Faccio T, Garcia-Bernardo J, et al. (2021) A Practical Proposal to End Corporate Tax Abuse: METR, a Minimum Effective Tax Rate for Multinationals. IES Working Papers 8/2021.
Picciotto S, Kadet JM, Cobham A, et al. (2021) For a Better GLOBE: A Minimum Effective Tax Rate For Multinationals. Tax Notes International 101(7): 863-867.