Last week, G7 leaders came to a deal on setting a global minimum corporate tax rate of 15% and to clamp down on profit shifting – the processes by which large multinationals move profits to different jurisdictions to minimise their tax burden.
The agreement was a significant step forward after years of negotiations failed to generate any significant progress on the issue of tax avoidance. The big tech companies are likely to see their tax bills climb significantly as a result of the measures.
But campaigners have argued that the deal doesn’t go far enough. Oxfam has already stated that 15% is ‘far too low’ to make any significant difference. The agreement has been worded to pave the way for future increases in the global minimum rate but getting there is likely to be a struggle.
The agreement is also likely to benefit larger, richer nations at the expense of those in the Global South, which are already harmed by unfair tax treaties. Many states in the Global South are struggling to meet their obligations to creditors as a result of the economic disruption caused by Covid-19, and this tax deal was a significant missed opportunity to support these states to shore up their finances.
There’s also the question of compliance. Securing the full adherence of the world’s tax havens will be a challenge. The UK will be under particular pressure to ensure that its network of crown dependencies and overseas territories, many of which are tax havens, comply with the new laws.
But the UK government hasn’t often resorted to coercion in its dealings with the crown dependencies and overseas territories, and when David Cameron tried unsuccessfully to pressure the crown dependencies and overseas territories to introduce registers of beneficial ownership to mirror that introduced in the UK, he was faced with significant backlash.
Clearly, there are a lot of holes in the deal. Alex Cobham of the Tax Justice Network said that, even after this deal, the global tax system remained ‘extremely unfair’. Nevertheless, securing agreement to the very idea of a global minimum corporate tax rate is a significant step forward in negotiations that have stalled for years. Perhaps the most accurate assessment comes from author Gabriel Zucman, who called it ‘historic, inadequate and promising’.
The deal belies the argument that globalisation has created a world in which corporations are more powerful than states. This argument plays into the hands of tax avoiding, polluting, human rights-abusing corporations by making people believe that nothing can be done to curb their power.
In fact, one of the main reasons for the progress in the G7 negotiations—aside from the end of Trump’s Presidency—was the fact that several states had moved towards implementing their own legislation to tackle tax avoidance by large multinationals.
In the UK, the Conservatives introduced a digital services tax designed specifically to combat aggressive tax avoidance by big tech. France also introduced a tax on the domestic revenues of the big tech companies in 2019 a move to tackle profit shifting of the kind that’s been targeted in the G7 deal. The French tax was more significant than the UK one but both riled the US, which is home to most of the big tech companies.
Unilateral action by a few powerful states shifted the state of play on tax avoidance and forced the world’s foremost superpower to come to the negotiating table. After the UK and France moved to tackle the power of the big tech companies, the US realised that other states might follow if it didn’t spearhead an initiative to tackle the problem itself.
When policymakers invoke the law of ‘global solutions to global problems’, it’s often an excuse for inaction: knowing that a global deal on any controversial issue is extremely difficult to reach, they can simply kick the can down the road by arguing that there is no point in acting alone on an issue like climate breakdown or tax avoidance.
Yet the context for the G7 deal shows this is not true. Strong action on an issue like tax by a few powerful states can shift the political context within which these negotiations take place. The same is true of climate breakdown – coordinated action by a few powerful states in the wake of this crisis will be likely to make it easier to reach more ambitious deals with the rest of the world in the future.
Globalisation is not a simple economic fact, it is a political process – one that is still developing, despite slowing and facing greater resistance in the period since the financial crisis. The way the world economy works is shaped not only by the laws promulgated by international institutions, but also those put in place by states. Governments have the power to hold multinationals to account – but only if they themselves are more accountable to their citizens than they are to corporations.