By Krasen Stanchev
On 31 October, the OECD presented to the Group of 20 (G-20) the report on the current tax situation in the world and the recommended common fiscal policies. It envisages the preparation of a draft template of an international agreement by the end of November, which will be signed by the end of next year and the rules of global corporate taxation will be applied.
Intentions and political will
There are two points concerning these rules:
• the right to tax more than 25% of the residual profits of the largest and most profitable multinational enterprises (MNEs) in the jurisdictions where the consumers of the goods and services of these enterprises are located.
• a minimum tax of 15% for MNEs with over € 750 million in sales revenue.
It is estimated that the first line of tax rights will provide more than $ 125 billion in residual income taxation, and the second - about $ 150 billion in additional revenue from the taxation of MNEs with revenues above that threshold.
On 1 November, the IMF welcomed the leaders and governors of the G-7 central banks for their intention to introduce such a tax as a basis for "strong, sustainable, balanced and inclusive" economic growth. The report became known a few days earlier, and the fund was recommending similar fiscal measures and a progressive tax for more than two years. This growth is one of the arguments used by the Group of Seven (G-7) in June to support the idea of the OECD. Another reason which was declared then was the need "to provide a secure and beneficial future for all."
In less than a month, 134 countries and territories joined the intention under the Global Initiative against Tax Base Erosion and Profit Shifting (GITBEPS), Bulgaria being among them. Support came from everywhere, including from the Bulgarian government preparing for early in July, and without any discussion. Not considering to my mind, the general opinion of non-governmental and non-union economists that the idea is harmful and perhaps unfeasible.
In early October, Estonia, Ireland and Hungary joined the group of supporters. Outside, there are countries that the OECD would rather put in the group of beneficiaries - Kenya, Nigeria, Pakistan and Sri Lanka. (These countries also support GITBEPS).
It was considered that Ireland refrained not only because of the national corporate tax of 12.5%, but also because it was unclear whether Apple, Google and Facebook, whose European business is run from there, would maintain their presence in the country. Ireland's position could frustrate the European application of GITBEPS in this part, especially if it were supported by other member states. But the owners of these and many other MNEs almost immediately after the G-7 meeting confirmed their opinion that they do not mind, but rather welcome the initiative. This position has often been described as paradoxical, but in fact it is completely natural.
For other reasons, President Joe Biden and Janet Yellen, his Treasury Secretary, as well as apparently most lawmakers in Congress and the Senate also support the OECD and the IMF.
There seems to be a global political will and consensus on the new tax policy. The OECD Secretary General described the initiative as a "diplomatic success". An international consortium of investigative journalists disseminated his opinion and supplemented it with opinions from its economists. The main news agencies around the world did the same.
Motives and illusions
Lots of leading researches seem to support the forecasts for an overall positive effect of the exercising of the right to tax residual profits (i. e. profit minus the cost of equity - in 2018 the OECD issued a 46-page side guide for the application of this method), applied country by country and from the introduction of the minimum corporate tax of 15%. None of them is explicit or unproblematic from a methodological point of view.
The "Missing Profits of Nations" is a report by the US National Bureau of Economic Research, prepared by economists from the Universities of Copenhagen and Berkeley, advised by at least 20 internationally renowned experts, published in 2018 and updated in April 2020. This report is quoted frequently and appears to be one of the documents motivating the views of the United States and other G-7 and G-20 countries.
According to the authors, almost 40% of multinational profits are transferred to tax havens worldwide. If they were subject to a 15% tax applied globally. If that happened, profits and taxation, therefore, would increase by about 15% in EU jurisdictions with high taxes and by 10% in the US, but would decrease by 60% in current tax havens.
The assessment is completely correct from the point of view of economic analysis rules. But the authors pay attention only to existing practices for calculating the so-called transfer pricing, leaving unexplored the potential effects on consumer prices.
Considering this picture, it is almost impossible for a minister, president or central bank governor to publicly oppose the intentions of the OECD or the GITBEPS countries. This does not mean that these people (working in the OECD and UN organizations are exempt from taxes) cannot use tax havens for security and self investment. The group of politicians and their supporters is one of the most numerous savers in such havens. The amounts they transfer there, are a relatively low percentage against the background of funds managed in offshore zones. The main motive of this act is saving taxes in jurisdictions with high tax rates, inconvenience from their fellow countrymen and instability of their own political privileges. It is also understandable why these and other owners of profitable MNEs support the idea of the OECD.
Their motives are most likely the following:
First, the payment of profit tax is financed by consumer prices, the reduction of the income of the employees in the enterprise or the investments, or by a combination of the three sources.
Second, these companies have already gained market share globally. But the high global tax is an obstacle to their potential competitors.
Third, both for transfer prices now and for residual profits in the future, some freedom of calculation and presentation of the necessary inherent costs is possible.
It is not clear why the support of the G-7, G-20 and the 136 countries and territories of GITBEPS is considered a tax or diplomatic revolution. It is even less understandable why the IMF is of the opinion that this change will lead to "inclusive economic growth".
In 2022, the global GDP is likely to reach a little over $ 100 trillion. If the OECD's calculations for a positive effect of € 275 billion are correct and if the initiative is implemented without problems and on time, this effect on the global economy would be 0.28%. However, it is possible, if this effect is observed in technologically advanced countries, that this tax will initially finance, at least in part, the IMF-requested aid to relatively poor countries worth about $ 100 billion. The insistence on finding this money dates back to 15-16 years ago.
For some unexplained reason, it is considered that when the new tax revenues fall into the hands of the governments of the "jurisdictions where the consumers of the goods and services of these highly efficient and profitable enterprises are located" (according to the OECD), these governments will spend them rationally and as intended. This perspective was not explored at all, but it is known that even well-intentioned aid and subsidies have well-traced negative effects.
On top of that, the reduction in global income inequality coincides with the reduction of corporate taxes, globalization and the expansion of transactions through low-tax jurisdictions. According to Branko Milanovic, who led the World Bank's research team, between 1952 and 2017, global inequality fell by about one third. The same evidence can be found in Sir Angus Deaton's 2015 Nobel Lecture and the work of at least two other Nobel laureates in economics.
The history of the introduction of income and in particular corporate taxes does not give much reason for optimism in the expediency of the GITBEPS. There is a well-known accounting aphorism attributed to John Stuart Mill that people do not hate taxes, only the act of paying them. In other words, they prefer someone else to pay them. One of the arguments for the Bulgarian government to support the intention of a global tax on profitable MNEs was that they would pay it, not the Bulgarian consumers of their goods and services. As mentioned above, consumer prices finance this tax.
By the way, two years ago, my colleague Petr Janský from Charles University in Prague, commissioned by the Greens in the European Parliament, examined the effectiveness of MNЕ taxation in the Union. It turned out that only in Bulgaria they fully comply with tax legislation.
There is another effect of the initiative which is difficult to be predicted: it has awakened dormant intentions to raise taxes both globally and nationally.
It is difficult to predict what the consequences will be. There is no research, but many new ideas are being developed to "improve" taxation. Another aphorism states that no one can come up with a bad idea for economic and fiscal policy that has not previously been proposed by another economist.