Global minimum tax to fall short of expectations, researchers warn

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The global minimum corporate tax of 15% will generate significantly less revenue than originally hoped for, due to several loopholes weakening the measure, researchers of the EU tax observatory warned.

The global minimum tax for corporations was agreed at the OECD and G20 in 2021 and was hoped to put an end to a race-to-the-bottom on corporate taxation, which has cost countries worldwide billions of dollars in tax revenue.

However, the agreement was substantially weakened compared to the initial proposal, Gabriel Zucman, French economist and director of the EU Tax Observatory, said in Berlin on Thursday (2 November).

“Multinational companies continue to put profits in tax havens subject to very low tax rates,” he said when talking at Berlin-based Hertie School. “We thought that we had made progress in addressing this, but the agreements we have are falling short and in fact risk fuelling international tax competition.”

The minimum tax rate is expected to increase global revenue from corporate taxation by 4.8%, a report by the EU tax observatory found, only half of what could have been generated with stricter rules.

During the implementation of the global agreement, several loopholes have been created which reduce the expected revenue, the researchers warned.

“The global minimum tax still allows for a race-to-the-bottom with corporate taxes (and may reinforce it) because it allows firms to keep effective tax rates below 15% as long as they have sufficient real activity in low-tax countries,” the experts noted, highlighting an exception included just before the 2021 agreement was reached.

This could benefit countries like the Netherlands and Ireland – the two largest destinations for profit-shifting worldwide – which can continue to offer companies tax rates lower than 15%, as long as some real activity of the company takes place in their countries.

Furthermore, an exception was created for tax credits, such as the ones granted under the US Inflation Reduction Act (IRA). If countries apply an official tax rate that is above 15%, but reduce actual tax payments through the use of tax credits, this would be exempted from the minimum tax.

“By structuring their tax policy slightly differently than in the past – offering generous tax credits as opposed to generous statutory tax rates – the governments of tax havens will be able to keep providing multinationals with very low effective tax rates while avoiding the global minimum tax,” the report explained.

Finally, a temporary suspension of the rules for US multinationals further weakens the implementation of the global agreement, the authors noted.

Without those loopholes, the minimum tax could have increased global corporate tax revenue by 9.4%, almost double the amount expected now. An additional 7.2% could be reached if the minimum tax was increased to 20% instead of the 15% agreed in 2021, the report stated.

How does the global minimum tax work?

While the think tank’s report estimates the additional revenue generated through the tax at the global level, things are more complicated when it comes to individual countries, because it is unclear where the additional revenue will be generated.

Under the agreement, countries currently offering tax rates below 15% are expected to increase their effective taxation to 15%.

If a country fails to do so, the country where the parent company is headquartered is able to tax the difference between the minimum rate of 15% and the actual tax paid.

If the headquarters country, however, does not use this right, a backstop mechanism is included so that other countries where the company operates are able to use the right instead.

In the EU, the minimum tax is implemented through a directive which member states have to translate into national law by the end of 2023, so that it starts operating in 2024.

Start with unilateral measures

While the global agreement was celebrated in Germany as a key victory of then-finance minister and today’s Chancellor Olaf Scholz (SPD/S&D), it was also enabled by the unilateral introduction of Digital Service Taxes by countries like France, which pressured the US to cooperate, the report noted.

Despite the shortfalls of the global minimum tax, this should be a lesson to learn for additional international measures to fight tax evasion and avoidance, Zucman said in Berlin.

“Even though the ideal is international coordination and harmonisation, the way to get there is first through unilateral action in countries where there is a political will to make progress,” he said.

In its report, the tax observatory recommended closing the loopholes in the global minimum corporate tax and increasing the rate to 25%, as well as introducing a global minimum tax on the wealth of billionaires, which often goes largely untaxed.

[Edited by János Allenbach-Ammann/Zoran Radosavljevic]