Who will a global minimum tax really benefit? Liechtenstein will be among the losers. Businesses, too.
Since the US government has changed, a lot of things have come into motion. One issue discussed already for a long time is international taxation and the so-called “tax havens,” but any international tax regime is virtually impossible without US involvement. The new administration seems more open to the idea of global taxation standards.
The US has now proposed signing an agreement on a minimum global corporate tax of 21%. The goal is to achieve a fair distribution of taxes between the jurisdictions where multinationals are based and the countries where their clients actually are.
What is the issue?
The alleged issue is that international companies may choose the jurisdictions they register their business based on low taxes. That has led to international competition for lower corporate taxes and a downward spiral.
Take the European Union, for example. Taxation regimes within the EU are entirely different. That’s one reason why the EU is in favor of a global minimum tax. According to Morgan Stanley’s analysts, such an agreement “would resolve the internal dispute within the region over different taxes and mitigate the risk of a new round of tariffs related to digital taxes that some European countries have implemented (of between 2-5%)”.
Needless to say that those countries who have so far attracted international businesses by creating a competitive tax regime will be the losers of a global minimum tax. Within Europe, the countries most affected would be Ireland, Hungary, the Netherlands, Cyprus, and Liechtenstein. None of these countries have put up much opposition so far.
Why might a minimum tax be a bad idea?
The goal is to sign an agreement at the G20 summit in July. Morgan Stanley believes the final result will be somewhere in the range of the 21% proposed by the US and the 12.5% pre-agreed by the OECD.
Now, how likely is it that such minimum taxation will come into force? Bureaucrats and cheerleaders of big governments will welcome the minimum tax. Businesses? Not so much.
For the EU, the initiative is a chance to harmonize taxation in the region, currently fragmented by 27 regulatory frameworks in each EU country. According to the EU Commission’s economic commissioner Gentiloni, the need for states to have more resources to reduce public deficits could be an incentive to reach an agreement. The same is true in the US.
But there are benefits to the global competition of tax regimes. The competition puts a limit on the tax burden governments can put on businesses. Take Germany, for example. The country has one of the highest taxation regimes in the world. It hurts the country more than it helps, as experts and businesses are leaving, many of them to Switzerland, which has much lower taxes.
Raising taxes is always the easy way out for governments. Taking away the element of international tax competition makes it easier for politicians but harder for businesses. So in the long-term, the effects of such a rule could be more negative than positive. But let’s see. The plan won’t be finalized before 2023. A lot can change by then.