For a better part of last decade, leading Western scholars have been trying to understand the root-cause behind the right-wing populism that enabled, among other seismic events, Brexit and the Trump presidency. They all seem to agree on one thing: corporate shopping for tax-light jurisdictions, as well as shifting of manufacturing jobs overseas, has limited governments’ capability to create more jobs and undertake infrastructure and social spending, thereby fueling public anger and resentment.
The global political elite has been complicit in failing to stem the tide of corporate greed, and this is especially true when it comes to the US government protecting interests of its large industrial, tech and hydrocarbon firms. But with growing backlash on both the right and the left of political spectrum, it appears that corporate wealth may soon find it difficult to maintain its coveted parking spots.
Last week, after years of high-level negotiations, OECD member countries, along with G20 nations and dozens of developing countries, agreed to a framework that they hope will rein in corporate tax arbitrage and place tech companies firmly under the ambit of global taxation. The new rules, which have been endorsed by 136 countries and jurisdictions, will come in force from 2023. While China and India signed on, Pakistan, Kenya, Nigeria and Sri Lanka have not endorsed the deal yet.
As per the OECD, the global corporations’ practices of tax avoidance and shifting of profits overseas cost the world up to $240 billion per annum, which corresponds to 10 percent of global corporate income tax receipts. Often, it is the developing countries that have to suffer, as large tech companies do business in those markets without a physical presence there or having to pay taxes there.
To bring fairness, the first major change concerns how global corporate income taxes will be re-allocated across the world in the future. If Company X, for instance, is headquartered in Country A but it also has business activities and makes profits in Countries B, C and D, the new OECD rules would allow for some of the Company X’s income tax collected in Country A to be re-allocated proportionally to Countries B, C and D.
This change will apply to all multinational entities that have global revenues in excess of 20 billion euros and profit margin of at least 10 percent. OECD expects this measure to re-allocate $125 billions of profits from some 100 global corporations to countries across the globe, where those companies have operations.
The second major change under this agreement is to impose a minimum corporate income tax rate of 15 percent across the world. The idea is that countries should compete more over business conditions than taxes. This rule will apply to global firms with sales of at least 750 million euros. OECD expects this measure to generate $150 billion in additional corporate income tax per annum.
While the Biden administration has lately received plenty of flak from its allies over the botched Afghanistan withdrawal, it has been working behind-the-scenes on tangible stuff, too. This global tax deal is arguably the clearest sign yet that the US is now back at the table. And this is an issue that can potentially have lasting imprint on governments’ ability to raise living standards. Countries like Pakistan, which have low fiscal space but yearn to attract foreign investment, can benefit, too.