Wednesday, August 4

Reinventing the international tax system

Eyes were on Venice over the weekend, where the G20 Finance Ministers were expected to give the go-ahead for what was to be the great reform of the international tax system, a long-awaited and urgent reform that lays the groundwork for how to tax the international profits of large corporations that today operate as fiscal phantoms. In short, a new tax model that adapts to the reality of the 21st century while putting an end to the predatory practices of tax havens and the harmful tax competition in which all countries have been plunged.

Let us not forget that the bill for these tax abuses, protected by years of political impassivity, has been paid by the citizens, who have seen how large corporations could multiply their profits while obscenely reducing the taxes paid. The balance has been a disinvestment in social policies or a greater effort on families and work, especially since the great financial crisis of 2008. And these decisions, policies, have conditioned the ability of countries to face the Covid pandemic -19.

For this reason, this final phase of the reform of the international tax system does not come at any given moment, but also, in a context of maximum budgetary and fiscal tension. In developing countries, debt is reaching unsustainable levels and threatens to destabilize the fragile international financial system on which the fragile post-pandemic recovery is based. Addressing a fairer reconstruction of this crisis requires decisive decisions as to who will bear the cost, but also how to prevent inequality from skyrocketing. It should be remembered that COVID 19 has not affected all countries equally healthily or economically. Nor has it done so between people from the same country. The most vulnerable people and communities have been the most impacted, those who have suffered the most from job losses and the last to access social protection programs, when there have been. Meanwhile, the wealth of the world’s greatest fortunes has reached heights never seen before.

It is in this complex scenario that negotiations were finally resumed to reform the rules that determine how much and where large multinational companies must pay taxes on their profits. At the beginning of June, the G7 countries gave their political backing, with great fanfare, which has accelerated the possibility of reaching a consensus, but also which has shown that it was nothing more than an agreement to protect their own interests. And if this agreement can jeopardize the operation of some tax havens, it is also a perverse bet for developing countries that it places in a false dilemma, to support an agreement that is unfair to them or to give way to tax avoidance. more excessive.

A complex crossroads. Because (almost) everyone agrees that the international tax system, designed 90 years ago, has become obsolete. So, nobody warned of the profound changes that globalization and the digitization of the economy were going to bring us. What they were clear about was that those who designed this model did so to favor the interests of those who already dominated international trade, of the rich countries. And for decades, many developing countries and civil society organizations have called for a profound reform, fairer. Rules that simply allow retaining where value and economic activity are generated, the tax benefits that legitimately correspond to them. The only thing that has been achieved with this model is that countries compete to see who lowers taxes on corporate profits the most. A race to disaster.

These discussions represented a unique opportunity to effectively reach a historic agreement. And an absolute political responsibility to achieve it. However, the agreement reached is unambitious and unfair. The interests of the rich countries and their large corporations have come before the people and the developing countries. Two are the main problems.

The first has to do with the proposed minimum effective rate of “at least 15%”. Far from the 21% that President Biden wants to apply in the United States, and below the 25% recommended by economists like Joseph Stiglitz or Thomas Piketty. At bottom, it is a concession that only brings us closer to the levels of well-known tax havens such as Ireland and Singapore. It is better than nothing, to be sure, but the bar is so low that it will hardly achieve the expected effect of ending tax competition. It will undoubtedly put stress on the most aggressive tax havens, but it will be to the benefit of the richest countries. It is a measure designed so that whoever can execute it is the country of the parent company. Therefore, according to our estimates, two-thirds of the additional income will go to G7 countries and the EU, while the poorest countries will barely account for 3% of the total, despite representing 36% of the total. world population. We are only perpetuating decades of injustice in the international tax system, while some European countries act as true tax termites in the global system.

The second problem refers to the agreed way of distributing taxes on the global profits of large companies that, despite obtaining large profits, do not have a presence for tax purposes. The idea is to redistribute part of these global benefits to the rest of the countries where the company is present. But the thresholds are so high that it will hardly affect about a hundred companies, those that invoice more than 20,000 million euros and with a profitability of more than 10%. They are few, so few that even digital monsters like Amazon could be left out. Not only that. The countries where multinationals are producing or generating their sales and profits, will only share a minimal part of global profits (less than 5%).

Fringes yet to be specified are also problematic. We already know that the devil is in the details. The financial sector, for example, has been left out of the agreement, undoubtedly due to pressure from Great Britain among others. Their exclusion means reducing global tax revenue in half.

It is difficult for this agreement to be a cause for celebration. Martín Guzmán, Minister of Finance of Argentina, a member of the G20, criticized the proposal, as did some African countries such as Nigeria or Kenya that even gave up signing the agreement. In these terms, we run the risk of increasing inequalities between countries.

But the game is not over yet. Until October we can still get a deal that is fairer and generates sufficient and substantial additional income for everyone, including developing countries. For this we would have to think about a higher minimum rate, 25%. And we would have to ensure that the benefits are shared in a balanced way with developing countries and that large companies that have benefited from the digitization of the economy, such as Amazon, cannot circumvent this agreement. Public opinion should be aware of the importance of the moment.

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