Too bad the “creators” of globalization did not pay attention to the elephant in the room, some 30 years ago. They thought about a lot of things regarding the regulation of free trade, but the regulation of tax wars between countries has been forgotten. So now, after these three decades of a race to the bottom in international taxation, we have to finish the work.
Without intervention, globalization itself is in peril
Many are calling the “global minimum tax initiative,” a tax revolution. Yes, in the sense that a global minimum tax has generally been considered a utopian idea. Just the hope of its adoption by the summer of 2021 shows that the international tax community is in turmoil, even in revolution.
Yet, in reality, the answer is no, it is not a revolution. It’s the missing link needed to complete globalization because without protecting countries against tax wars, globalization is doomed to fiscal injustice and ultimately, to failure.
We must finish the work
At the turn of the 21st century, a number of leading experts warned governments faced with the growing popularity of new phenomena such as tax competition and e-commerce, to be careful. In May 2000, with corporate tax rates beginning to fall in various countries, a working paper published by Reuven S. Avi-Yonah in the Harvard Law Review, explained that “globalization and tax competition lead to a fiscal crisis for countries that wish to continue to provide social insurance to their citizens at the same time that demographic factors and the increased income inequality, job insecurity, and income volatility that result from globalization render such social insurance more necessary.”
Finishing his 20-year stint as director of the IMF’s Fiscal Affairs department in 2001, Vito Tanzi issued this warning to tax administrations: “Globalization and the consequent international integration, together with rapid technological progress, is likely to affect both the ability of countries to collect taxes and the distribution of the tax burden...” The American Enterprise Institute for Public Policy Research came to an alarming conclusion on the 30th anniversary of its Tax Notes in 2002: “Absent successful attempts at tax harmonization, it seems unlikely that corporate income tax will exist when this fine journal assembles its 60th anniversary issue.”
At the same time, John Nash’s theories that put the limits of competition into perspective were popular in the public arena. John Nash himself was awarded the Nobel Prize for Economics in 1994 and the 2001 Oscar-winning movie A Beautiful Mind, which tells the story of his life, explained to more than 30 million people in its legendary bar scene, that “the best result will come from everyone in the group doing what’s best for himself… and the group.”
Although the limits and risks of competition were clearly in the air, international tax competition and the threat of a race to the bottom have remained ignored by the great “creators” of globalization. In making the film, Fast & Dangerous – A Race to the Bottom, some experts like economist Christian Chavagneux explained this situation by saying it was a huge mistake, more than an oversight. Other experts, like Pascal Saint-Amans, explained that this was a strategic approach because we might not have accepted to go global if this issue had been put forward in the first place. It is an interesting tax story to understand and relate, but ultimately, it’s up to our generation to find a way to finish the work.
There are several ideas for countering international tax competition, but the global minimum tax as currently proposed is a simple and effective way to curb the threat of a race to the bottom.
By putting a floor limit on lowering tax rates, it is still possible to reap the benefits of international tax competition while protecting against the resulting tax wars.
Moreover, since the global minimum tax requires the cooperation and coordination of a critical number of countries, its implementation will implicitly slow down competition between them.
And finally, the regime currently being discussed is quite brilliant, because it does not require the cooperation of all countries to be effective, which is often the problem and main limitation of international tax initiatives. Indeed, an American multinational, for example, would have to pay a minimum tax in the U.S. on the income it makes in a tax haven, even if that tax haven has not adhered to the measure. By not adhering to the measure, the tax haven loses tax revenue to the benefit of other countries, which could ultimately encourage it to increase its tax rate.
Canada has yet to take a formal position on adhering to the global minimum tax. Canadian multinationals are taxed at a statutory rate of 25%, and the effective corporate tax rate is about 12% in Canada. If this effective rate is partly due to the fact that Canadian multinationals take advantage of tax havens, we must expect some impact here in Canada from the global minimum tax.
If Canada has not yet decided on its adherence to the global minimum tax system, it may also be because it is difficult to combine this system with tax information exchange agreements that it has signed for the past 10 years with 24 jurisdictions, considered to be tax havens. These include the Isle of Man, Cayman Islands, Jersey, and Panama. Under these agreements, these tax havens agree to provide tax information on Canadian taxpayers who “hide” income in their own jurisdiction and in return, Canada has agreed not to tax dividends received from Canadian subsidiaries established in these jurisdictions.
In the end, it is as if these tax havens have agreed to stop the business they do with Canadian tax evaders and in return, Canada has agreed to legalize the tax exemption of income made by Canadian subsidiaries on their territory. By agreeing to adhere to the global minimum tax, Canada would be going back on its word in a way, and telling the tax havens with which it has signed these agreements that ultimately, the deal no longer holds!
Materiality and next steps
The global minimum tax targets 2,300 multinationals and the estimated additional tax revenue is of the order of $70 billion per year for all countries, assuming the rate is 12.5%, and $150 billion if the rate is 21%. A global minimum tax is very important for many reasons, but this additional revenue is tiny when you realize that the Covid-19 crisis cost countries $19 trillion in 2020 alone.
Let us not fall into the trap of focusing all our energies on this point. Billionaires also benefit from international tax competition. 2,800 billionaires on Earth hold a total wealth of over $13 trillion. As a tax expert with an accounting background, I learned that things have to balance and so, someone somewhere is paying the price for this super wealth. In addition, it does not make good economic sense to have 2,800 people on $13 trillion and a billion people living on less than $2 a day. A global minimum tax could therefore be applicable to them as well.
We also need to make sure that supposedly charitable private foundations start doing real charity. There is around $1 trillion stuck in these foundations in North America and they too need to be put to work.
Finally, let’s hope that the post-Covid world will be green and to make that happen, we can no longer ignore the difficulties of implementing carbon pricing of the kind that has been proposed by the international community for some years now. Faced with the environmental emergency, it is now time to develop new tax solutions that are complementary to those currently being proposed.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Brigitte Alepin is a Canadian tax specialist who has worked in practice for 30 years and is now a professor of taxation at the University of Quebec in Outaouais. She is the cofounder of TaxCOOP, the director of the movie “Fast & Dangerous Race to the Bottom,” and cowriter of the movie “The Price We Pay.” The Fast & Dangerous Race to the Bottom” recently won the Outstanding Achievement award at the Best Shorts Competition 2020 Humanitarian Awards.
Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.