Jack M. Mintz: Global corporate taxation faces strong headwinds

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Tax cooperation still has a long way to go

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The IMF’s April Fiscal Monitor devotes an entire chapter to cross-border tax coordination, both in terms of income tax and carbon tax coordination. He enthusiastically waves a flag for countries trying to increase their income via global cooperation, arguing that “much more needs to be done”. There is no apparent appeasement of the IMF’s exuberance for fiscal coordination, even in light of recent European events. But Russia’s attack on Ukraine demonstrated that, at best, global cooperation faces strong headwinds as the world splits again into Eastern and Western blocs.

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The collective approach to the two new corporate taxes imposed on large multinationals is very complex. “Pillar I” proposes to allocate corporate taxing rights to countries where customers use digital technologies, a reversal of the long-standing international practice of levying corporate taxes on income from where they originate. “Pillar II” is an overall minimum tax of 15% on profits earned by multinational foreign subsidiaries.

Even before the war, this globalist vision of the new international cooperation was already too optimistic. Although nearly 140 countries signed the pillars before this year, more than 50 countries were not involved in the negotiations, while four others explicitly rejected the agreement: Kenya, Nigeria, Pakistan and Sri Lanka. . The countries that did not participate in the negotiations are Bolivia, Ethiopia, Iran, North Korea, Iraq, Libya, Myanmar, Uzbekistan and Venezuela. Half of African countries and 78% of less developed countries have not formally signed it.

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It is also not clear that the proposals will be implemented. The Biden administration’s Build Back Better plan, which proposes a tougher US version of the global minimum corporate tax, has stalled in Congress, while Poland has blocked EU approval of the tax. minimum tax (Pillar II) unless Pillar I is adopted – which may not happen. as it seems unlikely that the US Congress will support a measure aimed primarily at US tech giants.

Beyond that, the Pillar II corporate minimum tax is controversial because it has had little serious input from the private sector. A complementary tax — the difference between 15% and an effective tax rate on adjusted accounting profits — may be levied by the host country or the country of origin. But it has several drawbacks. It will distort investment decisions by favoring labour-intensive technologies. It will discriminate against foreign investment in a jurisdiction that may be subject to minimum tax. And whenever the effective tax rate on book profits falls below 15%, it claws back the incentives provided by governments for investment, whether in manufacturing, renewable energy, high tech, or business. cycle sensitive.

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It is not surprising that international bureaucrats come up with such a complicated scheme that a small country can tax national income earned in a large country under the so-called “undertaxed profits” rule. Worse still, there is little revenue gain despite the significant economic cost of the new system. I recently estimated that for Canada, the aggregate minimum tax will generate $600 million a year in aggregate tax revenue, but will impose a net economic loss of $1.2 billion before even accounting for administrative costs and conformity. One has to seriously wonder why so many countries think this is a good idea.

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The big push for this new system came from the United States and the European Union, the same Western allies that are now sending weapons to Ukraine. This Western alliance, which accounts for around 55% of global GDP, has been key in countering Russian military operations in Ukraine. But not all countries agree. There is not a perfect overlap between the non-signatories of the corporate tax agreements and the non-signatories of the UN resolution against the Russian invasion, but it is quite striking that many countries reluctant to condemn Russia have not signed the corporate tax agreements either. Of the 52 countries that either opposed, abstained or did not vote at the UN, 33 have also not signed international corporate tax agreements. These include Pakistan and Sri Lanka as well as many African and Asian countries.

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China and India, which make up nearly a third of the world’s population, signed on to global corporate tax provisions even though they did not support the UN resolution. (Russia too, by the way.) Implementing the proposals will require cooperation between the national tax authorities of all countries. Will such cooperation take place in the future as the cleavages between East and West widen?

As for coordinating carbon pricing around the world, governments are yet to agree on carbon targets, with India and China choosing a longer time frame to achieve net zero emissions. And for the next few years at least, how keen will Russia and its friends be to manage climate change risks with Western countries?

Nor have countries agreed on a minimum carbon price, full coverage or border adjustments. Only 45 countries and 34 subnational jurisdictions have carbon prices in place, which are typically below US$40 a tonne and riddled with exemptions. According to 2021 World Bank data, carbon pricing revenue was US$53 billion globally, equivalent to US$1.60 per tonne of carbon dioxide emissions.

In short, tax cooperation still has a long way to go. With a potential long-term severance of relations between countries, we are likely at our wit’s end for major global deals. We may find it difficult to keep the ones we have.

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