Why is a global minimum tax required?
Tax systems around the world have been increasingly left behind in recent years by the rise of globalisation and digital media companies such as Google, Amazon, Apple and Facebook. They are firms operating across international borders that can shift profits around to exploit the most attractive low-tax locations.
Tax abuse by multinationals and avoidance by rich individuals costs countries around the world $427bn a year in lost revenues, according to research by the Tax Justice Network campaign group. The UK is estimated to lose £25bn of tax income due to profit-shifting.
Clamour for reform has grown as government finances have come under severe pressure during the Covid pandemic, and amid public anger over the relatively low tax rates paid by major corporations.
Proposals for a minimum global tax rate and allocating taxing rights based on where companies make their money – rather than whichever low-tax zone a firm chooses to book its profits – would help to end the “race to the bottom” where one nation slashes tax to attract business only to be outdone by another country. Such a plan would give governments greater certainty on revenue raising.
What is profit-shifting?
Multinationals exploit gaps and mismatches in the international tax system through a technique known as “profit-shifting”. This involves artificially allocating sales derived in one country to a lower-tax country. One of the ways this is achieved is by companies setting up a subsidiary in a tax haven and registering their intellectual property there. That entity then charges the company’s subsidiaries in other, higher-tax jurisdictions large royalty fees. By charging that “cost” to the market where the majority of revenues are made, profits can be reduced or eliminated, meaning no tax is paid. The royalty fees extracted in this way are booked as profit in the low-tax location. Profits are often shifted to countries such as the British Virgin Islands or Bermuda, which charge no corporation tax.
For US multinationals, corporate profit-shifting into tax havens has risen from an estimated 5-10% of gross profits in the 1990s to about 25-30% today, according to the OECD. The economist Gabriel Zucman