Dr. George Dibb, Head of the Centre for Economic Justice at the Institute for Public Policy Research (IPPR) and a fellow of the UCL Institute for Innovation and Public Purpose, argues YES
An international agreement on a global minimum corporation tax (GMCT) is needed and the UK should line up behind all the other G7 nations in supporting the current proposals from the Biden administration. UK corporation tax is set to rise to 25 per cent in 2023 so would be unaffected by a global minimum rate which is likely to be set between 15-21 per cent.
Firstly, a GMCT would be fair. Small and medium enterprises do not operate on a level playing field against multinational firms – your local bookshop has to pay a higher tax rate than Amazon because they’re not able to offshore their revenues to a tax haven like Luxembourg or the Cayman Islands.
“Offshoring” profits is estimated to cost governments around the world over $245 billion every year, with companies shifting $1.38 trillion of revenue. This has led to a race-to-the-bottom as countries seek to undercut each other on tax, while Biden’s proposals are designed to shut down the tax haven model and drive a race-to-the-top on investment and wider conditions such as infrastructure and skills.
Secondly, a GMCT would raise much needed revenues that could be invested in the recovery from Covid without increasing current tax rates. Figures from Tax Justice UK show that just by fairly applying corporation tax in the UK, consistent with the Biden proposals, would increase tax revenue by £13.5bn. OECD modelling of a GMCT estimates that this would “fall predominantly on highly profitable multinational entities” whose investment decisions are found to be less sensitive to tax increases. These are the firms who can afford it the most, and who have been unfairly avoiding tax for too long.
Some worry that a GMCT would be a loss of sovereignty as the UK would no longer have the discretion to set its own corporation tax rates, but that rests on the flawed assumption that we decide what tax companies pay now. As long as the largest multinational companies are free to offshore their profits to tax havens the UK has no sovereignty to tax them effectively.
President Trump’s roadblocking of an agreement on global tax shows how rare the current moment of consensus is. The UK government should get behind these plans.
Julian Jessop, an independent economist and Economics Fellow at the IEA, argues NO
There is some merit in agreeing common rules on the taxation of multinational companies, just as countries already do in areas such as trade and intellectual property rights. Nonetheless, the current proposals are a sledgehammer to crack a nut – and will probably miss their target anyway.
For a start, companies are only legal entities and cannot bear the economic burden of taxation themselves. Any increase in corporation tax would therefore inevitably be passed on to real people, including consumers and employees in the form of higher prices and lower wages. Would we be happy if other countries prevented us from cutting personal taxes?
The problem of domestic tax base erosion and profit shifting (BEPS) is also exaggerated. Some companies may still be finding artificial means to lower their tax bills by exploiting different tax rules in different countries, but tax authorities already have ways to close these loopholes.
There are also practical problems with the new proposals.
If the global minimum tax rate is too high, it would undermine healthy tax competition between countries. Most economists agree that corporation tax is a particularly bad tax which damages investment and growth.
If it is too low, it would not have any significant impact anyway. It has been suggested that the global minimum corporate tax rate might be set at just 15 per cent, but only three OECD countries (Ireland, Chile and Hungary) currently have a combined corporate income tax rate below this level.
The minimum tax would also have to take account of all the various allowances and other differences in national tax systems, which can drive a large wedge between the headline rates and the effective rates that companies actually pay. This would be a bureaucratic nightmare.
The other key element of the proposals is that companies should pay more corporation tax on the basis of where sales are made, or jobs are created. This would turn taxes on profits into taxes on economic activity itself, which again would make people worse off. This, too, would be a bureaucratic nightmare.
