Rome — Standing outside the Salone delle Fontane Friday morning, French finance minister Bruno Le Maire proclaimed the dawn of a new age for international taxation — one in which governments would band together to stop multinational corporation from driving tax rates ever lower.
But beneath the public professions of cooperation at the Group of 20 meetings, doubts persist over the lingering divisions between nations that could undermine the pact’s effectiveness and scope.
Treasury Secretary Janet Yellen has made the new minimum tax on corporations among the top priorities of her tenure, aiming to reverse a decades-long decline in the amount of revenue governments are raising from large firms and crackdown on tax havens. She has called the effort essential to funding government services like health care and public infrastructure, both in the United States and abroad. Failure to arrest the decline in corporate taxation, Yellen has warned, could starve governments of badly needed revenue while allowing the power of large multinational firms to grow dangerously unchecked.
To date, Yellen’s efforts have proved significantly more successful than observers initially anticipated.
With the help of the European countries and an ongoing global negotiation at the Organisation for Economic Co-operation and Development, the new pact has won the formal backing of more than 130 countries — including some low-tax nations, like Ireland — for a new 15 percent global minimum tax floor.
That measure, already signed off on by the finance ministers of the powerful Group of 20 countries gathered in Rome, was formally endorsed by heads of state like Biden and Macron on Saturday. The pact aims to deter corporations from artificially shifting their profits to international tax havens to evade payment obligations in their home countries.
The breakthrough represents a major reversal of the rise of tax avoidance by the biggest multinational firms.
“This is more than just a tax deal — it’s diplomacy reshaping our global economy and delivering for our people,” Biden said in a tweet on Saturday.
Yet for all the global tax unity trumpeted by the leaders of powerful countries in Rome, colder calculations of national interest have continued to remain just below the surface, undermining aspects of the international cooperation and, some experts say, standing to complicate the new agreement.
The global tax deal hinges on two key parts — one to establish a new global minimum tax on multinational firms, and the second, spurred in part by European countries’ desire to tax U.S. tech firms, granting taxation rights to countries over profits where the companies have no physical presence.
But already, many of the countries’ particular interests have altered or weakened the shape of these agreements.
For instance, Great Britain, along with other countries, won a change in the agreement exempting financial services — and therefore the city of London, the hub of Britain’s financial industry — from new rules over taxing profits outside of their corporate headquarters. (Supporters of that exemption said it makes sense since banks typically have to be structured in such a way that already requires them to pay a certain amount in taxes.)
Ireland, as part of joining the agreement, has said it would create a new system in which virtually all Irish firms are exempted from the new rules. Ireland also insisted on striking language that would have said the new tax should be “at least” 15 percent. The agreement instead simply marks the new tax rate at 15 percent, omitting the suggestion it could be higher. The decision may prevent other countries in the European Union from raising their rates above 15 percent after the European Commission puts the new directive to its member countries in motion.
“Some countries wanted higher minimum tax rates and I believe our position moderated those ambitions in the context of broader consensus and agreement,” Irish finance minister Paschal Donohoe said in a statement.
Many of the African nations insisted on, and won, exemptions to the deal for the “extractive industries” — such as mineral mining — as part of their support for the tax deal.
And while the global tax agreement applies to close to 140 countries, each country is responsible for writing its own tax law to adhere to the pact. That has fueled concerns that countries will offer other financial benefits to lure firms as a way around the new global minimum tax. Tax experts are closely watching to see what new deductions or other incentives countries begin to provide following enactment of the deal.
“Countries will continue to make it attractive for businesses to invest, despite the new set of rules for tax competition,” said Daniel Bunn, a tax expert at the Tax Foundation, a conservative-leaning think tank. “At what point does that trigger countries into recognizing this deal may not have been worth signing?”
The deal also includes exemptions to the global minimum tax for firms with certain amounts of payroll and “tangible assets,” or physical structures, in those countries. Those ideas make sense in principle, because the purpose of the agreement is to discourage “artificial” tax shifting of profits on paper. But in the long-run, some tax experts say, it could provide an avenue to maintain relatively lower taxes on corporations. The agreement sets out a 10-year period to adopt the measure, another concession to nations worried that implementing it more quickly could disrupt private industry.
“A low minimum tax rate and generous carve-outs make the global tax deal look somewhat modest,” said Mikhail Maslennikov, an Italian tax policy adviser at Oxfam Italy. Maslennikov said the penalties will effectively penalize the most aggressive corporate tax havens, but questioned if the deal would effectively curb corporate tax competition. “The new rules are de facto normalizing low-tax jurisdictions, such as Ireland and Singapore, and risk to transform the race to the bottom into the race to the new minimum.”
Treasury officials and other supporters of the agreement say it will include strong enforcement mechanisms. They also point out the extent to which the agreement will mark a sea change in existing law, given that most countries don’t levy taxes on their corporations’ foreign profits.
A Treasury official, speaking on the condition of anonymity to explain the department’s view, also pointed out that initial discussions over the global minimum tax pegged the potential new number at around 7 percent — far lower than the one ultimately backed. And other experts have said the few countries that remain outside the agreement will have strong incentives to fall in line with the new global system, in part to avoid being shut out of U.S. markets.
“The E.U. has a lot of momentum … there are a lot of built-in incentives in the structure to bring other countries on board,” said Thornton Matheson, senior fellow at the Tax Policy Center, a nonpartisan think tank. “I think the E.U. is in line to get its members to act quickly.”
Still, thorny national divisions persist. Key questions remain about how to resolve disputes between countries over who receives the revenue from the part of the deal related to raising new revenue from firms operating in their countries with no physical presence. Other concerns remain among some experts that the agreement could in fact represent a bad deal for countries in parts of the developing world, because to receive these new revenue the nations have to give up their existing taxes on tech companies. A handful of poorer countries with large populations, including Nigeria and Pakistan, have resisted joining the agreement, although most of the African countries have in fact endorsed the pact.
A Treasury official said in a statement that developing countries have for years championed reallocation of multinational profits, and will benefit from the new corporate minimum tax that takes pressure off competition with low tax countries. Developing nations are far more dependent on corporate tax revenue to fund their governments than rich ones.
“Getting 136 countries to agree on any global minimum corporate income tax rate is a key victory for the global tax justice movement, which took years of work,” said James Henry, an international tax expert at Yale University, in an email. “But it won’t mean much for developing countries unless we raise the rate significantly, plug the leaks and share the revenue.”