With government budgets around the world bloated by the pandemic and domestic political shifts, demand for revenues is rising, and so is frustration that large companies can use certain jurisdictions for tax reporting purposes.
A new trade clash between the US and Europe over where and how large companies are taxed has been averted, although negotiators from around the world haven’t yet reached a global pact, the Wall Street Journal reported.
Meeting this week in Paris, tax officials from 143 jurisdictions had hoped to agree on a new way to divide the taxes levied on the profits of about 100 of the world’s biggest companies. Such a deal – part of a series of changes to how, where and how much multinational companies are taxed around the world – would reallocate the taxation of some $200 billion in corporate profits, the report said.
Although not strictly a wealth management topic, the way that firms choose specific locations, such as low-tax ones, as domiciles for reporting purposes has been part of a wider form of “tax competition” that has provoked ire from countries worried about the “leakage” of revenue. In the autumn of 2021, a group of 20 major industrialized nations agreed a minimum corporate tax rate of 15 per cent, designed – so its framers hoped – to stop a “race to the bottom” over such tax. The move was prompted by President Joe Biden. Until the 2017 tax package of his predecessor, Donald Trump, the US had one of the highest corporate tax rates in the G20, far above those of countries such as Ireland or Luxembourg, for example.
Supporters of moves to combat such competition, and change rules about how international firms pay tax, say it prevents loss of revenue and promotes economic fairness. Opponents of these initiatives, such as the CATO Institute, a think tank in the US, have argued that they create a form of global tax cartel and remove pressure on high-tax/high-spend governments to change behavior, such as making taxes simpler in the first place. Congressional Republicans, for example, have criticized such moves. The political stakes have risen as governments’ budgets have been hit by the pandemic.
In its report on the talks in Paris – where the Organization for Economic Cooperation and Development is headquartered – Manal Corwin, head of tax policy at the inter-governmental group, said: “There is huge convergence and agreement on the major components.”
As the report noted, existing agreements over tax and international business stemmed from when firms needed a large physical presence in a country, such as a factory, to make profits there. In the digital age, physical proximity isn’t necessary to serve a nation’s customers.
(Editor's note: One question that arises is how this tax reporting issue and choice of jurisdiction fits into any sort of ESG framework. The tax conduct of a firm is not something that comes up much for discussion in this context. There's also the question of how, if a firm has a primary responsibility to its owners to maximize value – legally – then should they use whatever jurisdictions they can to keep taxes down as much as possible? The problem is that if companies park profits in an offshore center rather than refund them to people in, say, the US, this is eventually going to provoke stockholders to complain. But once the money is repatriated, it will be taxed at the full rate of that country. In which case, it might make more sense for governments to replace corporate taxes with taxes on dividends and other income forms instead, and cut a knive through the whole process of trying to harmonize corporate profits, and save a huge amount of paper-shuffling.)