*The views expressed in this article do not represent the views of Santa Clara University.
Credit: ECD/Victor Tonelli|Flickr
The growth of multinational corporations (MNCs) into economic superpowers has a tremendous impact on international tax rates. Over the past 40 years, corporate tax rates fell as countries competed for business investments across the globe. In the early 1980s, the unweighted worldwide statutory tax rate was about 40%. However, that average has fallen over the past few decades and today sits just under 25%. Even though President Reagan’s 1985 proposal to lower the American corporate tax rate from 46% to 33% did not start the global corporate tax “race to the bottom,” rates have continuously fallen internationally for four decades as countries around the globe compete for the tax windfalls of large MNCs. While this rise in global tax competition complicates the reliable taxation of MNCs, this is not the only issue facing global taxation. The expansion of difficult-to-value forms of intangible capital, complexity of international corporate structures, confusion of national politics, and proliferation of profit shifting schemes precipitated worldwide tax revenue decline as corporate profits steadily rose.
Hastened by the COVID-19 pandemic, the Organization for Economic Co-operation and Development (OECD), representing over 135 countries, proposed a total overhaul of the current global tax system, which would institute a new standard for the taxation of large MNCs. The proposal consists of a two-pillar strategy. The first pillar, “taxing rights,” is designed to change where companies pay taxes. The second pillar, the titular “global minimum effective tax rate,” will apply a baseline 15% rate to large MNCs with international profit schemes, increasing overall tax payments.
Although this proposal is supported by the current socio-political movement against global corporations not paying their portion of taxes through international gymnastics and tax loopholes, it faces uncertainty as debates on American economic sovereignty in Congress, ongoing disagreements in the European Union, and opposition from large corporations threaten to derail the deal. Economic pessimists worldwide doubt the resolve of the international community in the face of mounting challenges, but proponents of establishing this new economic world order say it would enable future tax cooperation as an initial agreement would be easier to adjust over time.
Global Tax Agreement
The global tax agreement would establish a cohesive worldwide tax structure. This would make it easier for nations to determine corporate tax responsibilities and facilitate the development of a global market where corporations are no longer incentivized to engage in forum shopping to resettle in the most suitable tax havens. The two-pillar agreement makes new rules for large MNCs involved in global trade, including those based out of countries that choose not to join. It will establish a baseline 15% tax minimum, increase taxes for corporations based in low-tax jurisdictions, and set higher taxes in the countries where they do the bulk of their business.
Pillar One involves two parts: “Amount A” and “Amount B”. “Amount A” for now applies only to the largest group of MNCs, companies with €20 billion in revenue and profit margins over 10%. This portion of the OECD plan is meant to prevent MNCs from forum-shopping, and would impact roughly $125 billion in global corporate profits. Proponents suggest it would increase tax revenue in developing countries. The companies affected would have a portion of their profits taxed in the same jurisdictions where they do business, with taxation up to 25% of profits above the 10% profit margin. This change would redistribute a portion of tax revenue from low-tax jurisdictions to the countries where the sales took place. While at first, this will apply only to the largest MNCs, after a seven year review period, that €20 billion threshold may be lowered to €10 billion, incorporating more of the world’s largest companies in the tax-generating agreement. Pillar One’s second component, “Amount B”, adds a much more straightforward method for companies looking to calculate their tax responsibilities for foreign business operations. It focuses on corporate marketing activities and may enhance taxation clarity by reducing compliance costs.
Pillar Two, the widely-known portion of this agreement, is a global minimum tax, estimated to increase tax revenue by $150 billion globally. Through the combination of an Income Inclusion Rule (IIR) “top-up” tax and an Undertaxed Payment Rule (UPR), it will deny deductions and require adjustments when an MNCs tax plan is not subject to an IIR. Pillar Two effectively brings all qualifying MNCs (with €750 million in global revenue) to the same 15% minimum global tax standard. Regardless of whether they are based in a jurisdiction that follows the OECD agreement, Pillar Two imposes the tax baseline where applicable, or adjusts the effective tax rate domestically when a corporation isn’t subject to the minimum in its home country. While agreement ratification and implementation delays have pushed back the timeline for Pillars One and Two to 2023 and 2024 respectively, prompt adoption across all OECD and Group 20 (G20) member states will lead to steady global tax revenue increase.
Current Outlook
Companies that fall into the MNC category have recently come under fire from their shareholders for their inconsistent tax reporting. In June 2022, Microsoft, one of the largest tech MNCs, received a shareholder resolution from investor AkademikerPension ahead of their annual investor meeting, for their inadequate bookkeeping of tax and financial information on a country-to-country basis. As recently as 2020, “Microsoft recorded profits of $315 billion in an Irish subsidy despite not having any employees there.” At the time, Microsoft allegedly did not disclose revenue in non-U.S. markets or disaggregate foreign tax payments. Pillar One of the global tax plan intends to specifically target instances of tax manipulation such as this. MNCs like Microsoft benefit from the low tax rate of their claimed sovereign home through local subsidies while concurrently reaping profits from the disparity between revenue and costs. This type of corporate behavior makes it harder for investors to evaluate the risk of higher tax regulations.” Microsoft has since released a statement saying that “[they] are committed to complying with all tax laws and practices of the countries [in] which [they] do business.” This commitment to adhere to the OECD’s plan to promulgate a fair and simplified global tax policy could rally other large MNCs to follow its example.
On the other hand, while willing MNCs have the capability to be a powerful stimulus for adoption of the OECD plan, other large business interests, labeling themselves the “Business Roundtable,” (BR) are reluctant to adapt to changes. The BR exclusively represents the CEOs of “America’s leading companies” including tech giants such as Adobe, Amazon, Apple to name a few. The BR has taken issue with Pillar One, specifically regarding Amount A, of the OECD’s global tax plan. The BR strategically alleges that under Pillar One, there would be a lack of protection for taxpayer information. These powerful CEOs contend that protections for such confidential information should be implemented in Amount A, as described in the OECD public consultation document released on May 27th, 2022. The BR urges that only relevant tax information should be released to the Lead Tax Administration, which shares the information of qualifying parties for purposes of Amount A allocations. Additionally, this business interest group asserts that the confidentiality provisions of the OECD should enforce these privacy obligations upon tax authorities by “preventing Amount A allocation to… jurisdiction[s] responsible for breach or misuse of taxpayer info.”
The United States Congress is also beginning to show its discontent with the plan. According to Bloomberg Law, Democratic Senator Joe Manchin said in July that “he’s not prepared to go ahead with a legislative package that contained the measure.” While this does not spell certain doom for the plan, U.S. influence, much like Microsoft’s, holds significant global market power and can either be a propelling force for upholding the global tax plan or an anchor preventing the plan from successful implementation. While the U.S. political system contemplates the legislative reality of the OECD plan, the global tax plan’s titular Pillar Two anticipates and actively mitigates the effect of holdout countries. Essentially, the United States must get on board or be left behind as uncollected tax revenue from substandard sovereign rates will be collected by other nations in its stead.
Impact on International Corporate Law
Once set into motion, this OECD tax deal will be arguably the most successful step towards international economic integration of tax standards across the globe. By allowing countries to collect from MNCs based in countries not participating in the agreement, the international community would be putting an end to decades of laissez faire international tax policy where only the most competitive countries succeed. In a time of highly intricate systems of global economics, simplifying the global tax system will bring clarity to corporations and additional revenue to nations across the world. Developing nations in particular will be better equipped to meet their public policy goals by using the increased tax revenue to fund economic stability and infrastructure projects.
It should also facilitate future updates to ongoing international tax policy by establishing a baseline agreement of international tax cooperation. Lastly, this agreement’s ratification across all global powers and proliferation worldwide will send a clear, unified message in the international business community that the days of one-off tax negotiations made between local clusters of sovereign states are over. The tax haven inevitability of global tax competition has come to an end as countries who choose not to participate will simply be losing out on potential revenue, which will be collected elsewhere.
Adoption and implementation of the OECD’s global tax plan is the first step towards updating the competitive and outdated global tax system that has favored MNCs for decades. It intends to establish a new baseline in worldwide tax standards, allow for much-needed tax reform, and reassert the power of intergovernmental relations worldwide over large corporate interests. The OECD global tax plan is expected to take full hold in 2024 and it is up to America to protect her international interests by taking an active role in the global tax plan so as to not be left behind.