Ambitious 2021 Global Minimum Tax Agreement Hindered by Loopholes, Warns EU Tax Watchdog
An agreement made in 2021 by over 140 countries and territories to combat tax havens and ensure multinational corporations pay a minimum tax has been significantly weakened by loopholes, resulting in a much lower revenue than initially anticipated, according to a tax watchdog supported by the European Union (EU).
The landmark agreement, brokered by the Organization for Economic Cooperation and Development (OECD), established a minimum global corporate tax rate of 15% with the aim of preventing companies like Apple and Nike from utilizing accounting and legal strategies to shift profits to low-tax or no-tax jurisdictions.
According to a report released by the EU Tax Observatory on Monday, the agreement was expected to generate approximately 10% of global corporate tax revenue. However, due to the weakening of the plan, it is projected to generate less than half of that, accounting for less than 5% of corporate tax revenue.
Many of the anticipated revenues have been lost to loopholes, some of which were introduced during the refinement process of the agreement by the OECD, which is yet to come into effect. The tax watchdog estimates that a 15% minimum tax could have raised around $270 billion in 2023, but with the introduced loopholes, this figure drops to approximately $136 billion.
During the summer, the OECD agreed to postpone a provision until 2026 that would have allowed foreign countries to impose additional taxes on U.S. multinational corporations failing to meet a 15% tax rate on their overseas earnings.
The EU Tax Observatory also highlighted that even under the rules of the 2021 agreement, companies would still have the opportunity to evade taxes. For instance, companies with tangible operations such as factories, warehouses, stores, and offices in a specific country may continue to pay a tax rate below 15%. This carveout raises concerns about encouraging firms to relocate production to countries with lower tax rates, intensifying the race-to-the-bottom approach to corporate income tax rates.
An additional loophole allows countries to provide tax credits for activities such as research and investments in local factories, enabling companies to lower their tax rates below the 15% mark while still complying with the agreement.
The Tax Observatory also expressed worries about the competition among governments to offer tax incentives for green technologies aimed at combating climate change. Although these incentives align with environmental goals, they also deplete government revenues and potentially exacerbate income inequality by primarily benefiting shareholders who tend to have a higher income distribution.
The report also revealed that multinational corporations shifted $1 trillion, representing 35% of their profits earned outside their home countries, to tax havens. American companies accounted for approximately 40% of this global profit shifting.
Last week, U.S. Treasury Secretary Janet Yellen stated that an agreement on taxing companies generating profits in countries where they have no physical presence, such as through digital services, would not be finalized until 2024. Yellen mentioned that certain important matters for the U.S. and other countries still need resolution before the treaty can be signed.
The EU Tax Observatory, led by renowned economist and tax-and-inequality researcher Gabriel Zucman, has proposed a 2% global tax on billionaires’ wealth, which it estimates could generate $250 billion annually from fewer than 3,000 individuals.
Despite the criticisms regarding the weakening of the minimum tax agreement, the EU Tax Observatory commended a separate initiative aimed at preventing the wealthy from evading taxes. Since the introduction of the “automatic information exchange” in 2017, tax authorities worldwide have been sharing taxpayer information from financial institutions to enhance tax law enforcement. This measure has effectively put an end to bank secrecy, with only 25% of offshore wealth belonging to the world’s wealthy now escaping taxation.
The EU Tax Observatory emphasizes that the effective tax rates of billionaires remain significantly lower than those of other population groups due to tax avoidance schemes. In the United States, billionaires pay an average effective tax rate of 23%, including all levels of government taxes, while the poorest 10% of Americans pay a higher rate of 25.6%.
Overall, the EU Tax Observatory report highlights the need to address the weaknesses and loopholes in the global minimum tax agreement to ensure that multinational corporations fulfill their tax obligations and to prevent further erosion of tax revenues.