For almost a century, international tax was a byzantine and foreboding world into which few but the cognoscenti would dare to venture. It took the huge upheaval of the 2008 global financial crisis to change the game.
In the absence of modern tax regulation, governments in desperate need of revenues realised how far their sovereignty had been eroded. A race to the bottom had set in, with beggar-thy-neighbour competition leading to plummeting corporate income tax rates and shrinking tax bases.
We have come a long way since then. President Joe Biden’s announcement of an ambitious tax plan for the US has added momentum to a decade-long effort – led by the G20, with the support of the Organisation for Economic Co-operation and Development (OECD) – to restore tax sovereignty. It is a once in a lifetime opportunity to achieve a complete overhaul of the international tax system, to provide more certainty for businesses and everyone pays their fair share.
Why is a global tax overhaul necessary? The economy has changed dramatically over the past 40 years. Bricks and mortar businesses have given way to a digitalised economy driven by intangibles, such as copyrights and patents, which are extremely mobile and devilishly slippery for the tax expert working within a system designed for traditional tangible goods. Value creation is concentrated within a few companies, the clear winners of globalisation. Many of the largest and most successful firms often pay the least corporate income tax. The sense of unfairness – for citizens and governments alike – has become untenable.
The global financial crisis was a wake-up call to governments. It prompted them to work together to curb illegal tax evasion by individuals and aggressive tax avoidance by multinational companies. The OECD/G20 base erosion and profit shifting (Beps) initiative helped close down loopholes and modernise the rules. Through the system of automatic exchange of information pioneered by the OECD and approved by the G20, we began to turn the tide. Since 2009, €107bn (£93bn) in additional tax revenues have been identified. Countries have now exchanged information on more than 84m offshore financial accounts, worth €10tn, and consequential additional revenues will follow.
Today, we are at a crossroads: push forward with greater effort on tax cooperation, or face the risk of countries taking unilateral measures. This would not only result in increased tax uncertainty but could provoke a tax-driven trade war – the last thing a world economy ravaged by the Covid pandemic needs.
Since the delivery in 2015 of the Beps Action Plan, the 139 members of the OECD/G20 Inclusive Framework have been working on a consensus-based solution to “address the tax challenges of the digitalisation of the economy”. But progress has been too slow. The new US impetus is just what was needed to get this negotiation over the line by mid-2021.
The OECD’s proposed solution is twofold. First, to update the rules, to allow countries to better share taxing rights on the winners of globalisation, in particular those that have taken advantage of the digitalisation of the economy. Our plan is to establish new rules that will allow a foreign company to be taxed in the country where it makes its money, even when this company does not have a physical presence there. We also advocate a fairer allocation of these profits, so countries that are markets for multinationals also benefit. After years of hesitation between countries on which companies should be in the scope of a solution, we are hopeful a consensus will soon emerge, concentrating on the most profitable and largest companies.
The biggest change, however, stems from the US decision to call time on the “race to the bottom”. The Beps project brought the concept of a minimum tax on the profit of multinationals to the fore. Changes to the US tax regime in 2017 introduced the principle of a minimum tax on US multinationals’ profits left offshore, at an average effective rate of 10.5%. Biden’s plan is to tighten this rule considerably, bring the minimum rate to 21% and advocate for a worldwide move in that direction to limit tax competition between countries.
Agreement on these two pillars would rebuild trust in the global tax system. It will require countries to agree on a standstill and rollback of unilateral measures.
As I approach the end of my term as secretary general, it is my lasting hope that we learn from the previous crisis to build forward better. Concluding a global tax deal in 2021 would be the culmination of many years of hard work and mark a new era for a better regulation of globalisation.
