[ad_1]
Let’s not be too curmudgeonly: the agreement for 130 countries to reform the international taxation of companies is a great time. It is not uncommon to reach a near global consensus on something with such concrete consequences.
While the congratulations are in order, the result is, at best, mixed. Here is the good, the bad and the ugly of reform.
First, the good. The agreement addresses the worst issues of international taxation of profits. These come from the principle that tax rights follow the residence of corporate entities. This may make sense when value added arose from the production of physical goods. When value resides in intangible services and intellectual property, it is a recipe for abuse. It is estimated, for example, that 40% of the world’s foreign direct “investment” is structured to reduce taxes rather than for real business investment reasons.
These invitations to the system have not only meant that multinational companies pay less taxes than lawmakers also claim. Governments also set lower tax rates than if they did not fear that these companies would move their profits elsewhere.
The agreement attacks this by introducing an overall 15% minimum profit tax rate and changing the right to tax a portion of that profit from the place of residence to the place of sale.
Economists who have cut the numbers believe this makes a significant, if not groundbreaking, difference. An upcoming report by EconPol researchers Michael Devereux and Martin Simmler estimates that tax duties at $ 87 billion in profits will be redirected to countries of sale. The Official Council of Economic Analysis (CAE) of France amounts to 130 billion dollars. At typical rates, this represents an annual tax revenue of $ 20-30 billion.
The minimum tax, find the CAE, could increase corporate tax revenues by between 6,000 and 15 billion euros for each of France, Germany and the US.
The result is somehow removed from the previous focus on Big Tech. The political impetus came from European states outraged by the ridiculous taxes paid by the US Internet sector despite the huge revenue generated in their markets. Because they unilaterally approved sales-based digital services taxes, they gave political impetus to global talks.
But financially, it never made sense to highlight digital services. The wonders of intellectual property accounting allow multinationals to eliminate the benefits of highly tangible goods and services, from coffee cups to taxi rides. Including all the larger multinational corporations, a demand from the United States, therefore meant an improvement over previous plans.
Now for bad. The agreement only partially solves the problem. Too few multinational companies are included. Even with a minimum rate, most corporate profits will continue to be taxed according to the residency principle. Therefore, the anomalies it generates will also be maintained. The modest minimum rate leaves incentives to move profits to low-tax jurisdictions (which therefore have little reason to claim). The deal will not be removed from the poor optics of belt-tightening governments and tax-dodging mega-corporations, nor once politicians begin to look for ways to close public deficits.
There are also special ones cut for banks and natural resource companies. This can be justified for the latter; it makes sense to record them where they extract hydrocarbons and minerals. For banks, the pretext is that they are regulated and taxed in the markets they serve. But if that were true, they would not be affected by the reallocation of tax rights. In fact, they had a lot to lose: Devereux and Simmler find that the reallocated tax base would be twice as large without the bank being cut.
Finally, the ugly. Governments have missed the opportunity to simplify the rules, leaving fertile ground for new and intelligent techniques to circumvent their intent. Instead of haggling over rungs and thresholds, leaders could have negotiated the relative weighting of investment, employment, and sales in a fully formula-based allocation of the global profits of multinational corporations.
Over time, thresholds can be lowered and exceptions reduced. But not if this agreement is made to prevent future changes. The US has demanded that other countries withdraw unilateral digital taxes when the new rules are sealed. This is reasonable only to the extent that it does not block framework revisions.
This welcome process should not stop there. This was a giant leap for politicians. Still, it remains a simple first step for the global economy.
[ad_2]
Source link
