In the G-7 meeting held last week, the world’s seven most advanced democracies agreed to back a new global tax minimum of 15% to be applied on multinational companies regardless of where they are based. This agreement is the first decision at a global level taken regarding fiscality in the past 3 decades. It is aimed at ending the “race-to-the-bottom”, in which countries implement lower taxes to attract multinational businesses to their economy, and especially at regulating tax havens. This new policy, if implemented, is predicted to affect tech giants such as Facebook, Apple, and Amazon, which have notoriously avoided taxation in their home countries. Additionally, the policy is seen as a solution aiding economies to recover from the post-Covid-19 shock.
What does this mean for the future of the global economy? Why are these decisions being made now? To answer these questions and understand the implications of the deal better, The Paris Globalist spoke with Dr. Bruno Jetin, an economist and associate professor at Sorbonne Paris Nord University.
What is the significance of this G-7 deal? What does it mean for the future of multinational companies?
“Well, I believe the great multinational companies would be quite happy with this agreement, because initially the project was to tax them at a much higher rate. In [U.S. President] Biden’s initial proposal the rate was 21%. It is now reduced to 15%. Since most multinational companies already pay around 16% corporate tax, for them this agreement is quite acceptable and harmless.”
Dr. Jetin also pointed out that for this minimum to be implemented, the G-7 agreement will have to be discussed with the G-20, and as of now no details of how the taxation is going to be implemented have been revealed yet. He told TPG that between now and the eventual implementation of the agreement, there can be many changes. “It has to be accepted by a larger number of countries, and in particular ‒ let us not forget the big absentee in the G-7 ‒ China. Without the participation and support of China, and other large economies, the agreement will not succeed.”
However, according to Dr. Jetin, despite the deal not being truly radical, it still holds great significance as the first fiscal decision at the global level in at least 30 years. “So ideologically and symbolically it is important to observe that it is still possible to do something.”
After decades of not addressing the corporate tax issues, why did the G-7 decide to propose a deal like this now?
“I believe, essentially, it is because of the U.S.A.,” says Dr. Jetin. “The Biden administration has promised huge public spending programs, and requires taxation to fund them.” Biden’s initial promise was to invest about $2.5 trillion into the economy, which was then reduced to $1.57 trillion, and later on further reduced after negotiations with the Republican party.
“Biden wants the budget to be a bipartisan agreement. It is a political competition for approval in the US Congress, but even if the spending was reduced to 800-900 billion dollars, the tax revenue has decreased so much in the past decades that the administration will need to increase, at least modestly, the corporate tax”.
“Initially Biden’s proposed tax rate was 25%, which was then lowered to 21%, and now in less than 6 weeks, Biden has agreed to 15%. He is also now able to use the idea that other countries were not ready to implement a higher tax rate and consider the G-7agreement as a personal victory”, he said.
French Finance Minister Bruno Le Mer had called the 15% a ‘starting point’. Would this support, along with Biden’s desire for the initial 25%, mean a possible increase in the minimum corporate tax rate in future discussions?
“Well, what insider observers of the G-7 meeting reported was that though officially France and Macron especially claimed they wanted a 21% tax rate, in the background there was nothing done to lobby for this. The French administration has done nothing to get EU agreement on 21%, and they are presenting the G-7 agreement as a big step, which, in fact, is not the case.”
What does this deal then mean for economies which use low corporate taxes to incentivise businesses, such as Ireland or Luxembourg?
Taking the example of Ireland which has a corporate tax today of 12.5%, Dr. Jetin tells us that an increase to 15% is a modest change that will not impact the economic benefits extensively.
“These countries like Luxembourg, Ireland, and the Netherlands, which are not formal tax havens but do have lower tax rates, will face a modest decrease in their tax revenues, but not much.”
Moreover, Dr. Jetin emphasizes that the details of the deal, such as the status of the tax base, have not yet been decided, and the deal has a long way to go before it can be implemented. “Fiscality is still an important part of sovereignty, we will have to see how each country chooses to implement the agreement”.
The deal is presented as something that will aid in the recovery of the Covid-19 economic shock, particularly for developing nations. If this deal is implemented, how far will taxing corporations at 15% aid in economic recovery?
“Even if the agreement is accepted by the majority of the countries, and implemented as early as 2022, the rich countries have not made any promises about using the funds for the development of lower income countries”, Dr. Jetin said regarding the possibility of any official deployment of aid or debt relief which would tangibly benefit developing countries at this time.
He is also not optimistic about poorer countries having the capacity to tax huge multinationals to truly benefit from the tax agreement. “Many developing countries do not have the administrative capacity to collect the tax from powerful multinationals. They don’t have the human or technical resources.” Additionally he cites high levels of corruption and inequality which undermines the appropriate use of these funds.
However, this is the case for multinational corporations such as those in the mining industry and other primary or secondary industries. “Online companies are an exception in the regard that most of them don’t pay any tax at all. If developing countries have the political will to enforce this tax on these companies it is still an important improvement,” says Dr. Jetin.
What do you think is the relevance of the G-7 today? Is there a place in today’s world for a group of wealthy democracies like that?
“In the past the G-7 promised to reduce inequalities, end poverty, to engage the energy transitions, and we are still waiting for these wonderful things to happen. So far the progress has not been very spectacular, so I’m not expecting a lot from this new promise.”
He also highlights the absences of China and other important economic players in the G-7. “Today, the G-7 is more like a club where rich western nations discuss and try to reach compromises. There are other forums such as the OECD or even the UN which are really important to really reach global agreements where some progress can be seen.”
What advice do you have for students when looking at this new agreement?
“This was important because it was the first time that countries and their heads didn’t put all their hopes in private initiative. In a sense the initiative to have this agreement rehabilitated the legitimacy of the state and public policy in the market.” Dr. Jetin traces this agreement back beyond the pandemic to the 2008 economic crisis that plunged the world into recession.
Though the actuality of this deal may be discouraging, Dr Jetin sees a glimmer of hope from the possibility of a stronger state to implement policies that improve daily life.
“Also many neo-liberal ideas such as the trickle-down effect, have now led to this opening up of new political spaces to develop new ideas for the future. The G-7 agreement is just a start of the new initiatives taken by the states pushed by the pandemic and other crises into a direction where they can no longer ignore their responsibility towards averting the degradation of reality. Their obligation extends to other public policies, particularly fiscal policies, as for new public initiatives corporate taxation is key.”