by Spencer Feingold*
In 2021, more than 140 countries and territories agreed to implement a 15% minimum tax rate on multinational corporations. The landmark agreement, however, has been “dramatically weakened” by major loopholes, according to a new report by the EU Tax Observatory.
“The proposed 15% minimum corporate tax rate for multinational companies—at the onset, far too low—has been made largely toothless by a series of loopholes and carve-outs,” Nobel prize-winning economist Joseph Stiglitz wrote in the report.
The Global Tax Evasion Report 2024 stated that the 2021 agreement, which is still being implemented by national governments, could have generated new tax revenue that equalled nearly 10% of the corporate tax revenue collected worldwide. However, according to the report, a “growing list of loopholes” has diminished the expected tax revenue to less than 5% of global corporate tax revenue.
Without carve-outs, the report noted, the expected amount of additional tax revenue from a global minimum 15% tax rate would have been roughly $270 billion in 2023—an increase of 22% from the carve-out baseline year.
“The global minimum tax, as things stand, would generate only a fraction of the tax revenue that could be expected from it based on the principles laid out in 2021,” the report stated. “Even more worrying, the global minimum tax still allows for a race-to-the-bottom with corporate taxes (and may reinforce it).”
’A step in the right direction’
The global minimum tax agreement, which was brokered by the Organization for Economic Cooperation and Development (OECD), consists of a two-pillar approach to harmonise corporate taxation. Pillar one addresses profit allocation for multinationals while pillar two mandates the 15% minimum corporate tax rate.
At the World Economic Forum’s Annual Meeting 2023 in Davos, Switzerland, Gabriel Zucman, the director of the EU Tax Observatory, said the 2021 agreement is a “step in the right direction” but that the deal is “insufficient” and “conceptually and philosophically flawed.”
“In practice, multinational firms will still be able to pay significantly less than 15%,” Zucman said during a public session in Davos. “There are carve-outs and they are very large.”
One of the loopholes noted in the EU Tax Observatory report is the ability of governments to provide tax credits to corporations operating in their country. Another carve-out weakening the global minimum tax pact, according to the report, is the fact that the deal allows corporations to keep effective tax rates below 15% as long as the company has sufficient operations in low-tax countries.
“Tackling tax evasion and harmful tax competition are particularly essential in the current context,” Stiglitz added, noting the increasing need for funding to combat issues like inequality and the climate crisis. “We need to make sure those at the top of the income ladder who certainly have the financial means don’t wriggle out of them.”
In July, 138 countries and territories agreed to an OECD Outcome Statement that detailed the implementation progress for the 2021 tax deal. The statement, according to the OECD, followed months of “intense technical negotiations” on how best to continue the adoption and implementation of the agreement.
“The [Outcome Statement] proves that despite the challenges and compromises along the way, multilateral dialogue works and can deliver results to tackle shared challenges requiring shared solutions,” OECD Secretary-General Mathias Cormann said in a statement. “This work is critical to governments and our economies – ultimately, to be able to raise the necessary revenue to fund the essential public goods and services for their citizens.”
*Digital Editor, World Economic Forum
**first published in: Weforum.org