A global minimum rate for corporate tax would decrease tax competition which is detrimental to public economies and causes inequality. European Union should support OECD, United States and others in adopting the minimum level.
Multinational corporations can easily avoid corporate taxes (taxes from their profits) by transferring their immaterial activities such as patents, royalties and software to countries with low corporate taxes. Thus the profits from these activities are taxed lightly, regardless of where in the world the sale of the corporations’ products takes place.
Many countries have lowered their corporate tax rates to attract corporate activity to their regions. This is a “race-to-bottom”, in which nearly all countries eventually lose, as decreasing tax levels bring smaller and smaller tax income even to those countries that manage to attract the corporations.
Tax havens have been estimated to decrease countries’ corporate tax revenues by 500-600 billion dollars per year. At the global level, the average corporate income tax level has decreased from 49 percent in 1985 to 23 percent in 2019.
Increasing the corporate tax rates would bring the countries more tax income and help to decrease the rise in income inequality that is occurring within countries. The rise in income inequality stems partially from the advancements in automation and the subsequent prominence of capital instead of labor as means of production. With tightened corporate taxation, the wealth produced by technological progress could be distributed more evenly than now.
Global minimum corporate tax rate as a solution
Setting a global minimum rate for corporate taxes would help to eradicate tax havens and increase corporate tax revenues globally. In the model suggested by OECD and US President Joe Biden, the home country of a corporation could set an additional tax on those profits for which the corporate taxes are paid to countries (tax havens) whose corporate tax rate is less than the agreed global minimum rate. The additional tax would equal the difference between the minimum rate and the tax haven’s corporate tax rate. For example, if the global minimum rate was 21 percent (as suggested by the Biden administration) and the tax haven’s corporate tax rate was 12 percent, the home country of the corporation could tax the corporation’s tax haven profits by 9 percent. With the minimum rate, tax havens would lose their competitive advantage and corporate tax revenues would increase globally. OECD suggests that an agreement on the minimum rate could be reached this summer.
The European Union should back the global corporate minimum tax rate in order to ensure its effectiveness and to increase the Union’s tax revenues. The greater the numbers of countries who adopt the minimum rate and the greater the proportion of corporations covered, the more efficient the system is. It could become profitable for tax havens to set their corporate tax rates to match the global minimum rate in order to not lose tax revenue to countries setting the additional taxes. The minimum rate should be adopted as widely as possible also to reduce companies’ options to change their official home country to one which has not adopted the minimum rate. The adoption of the minimum rate across countries could be enhanced using trade policies. When setting the global minimum rate system, it is vital to advance the rules regarding the coverage and tax deduction criteria of corporate taxes so that they won’t give any country an unfair competitive advantage over others.
The harmonization of corporate tax rates by means of a global minimum rate could open the door to broader global tax harmonization. In climate change mitigation, it would be important to advance carbon pricing in terms of a global carbon tax, for example. The carbon tariffs planned by the EU are comparable to the minimum corporate tax. They would push the rest of the world to adequately high carbon pricing, while the global minimum corporate tax would push the world to adequately high corporate tax rates. In an increasingly globalized world, we need more global systems.
Chair, Finnish Greens for Science and Technology