Let us not be too narrow: the agreement reached by 130 countries on international corporate tax reform is an important moment. There is almost no global consensus on something with such specific consequences. Although the congratulations were orderly, the results were ambiguous at best. This is the good, the bad and the ugly in the reform.
First of all, good. The transaction addresses some of the biggest challenges in international income tax. They follow the principle that tax claims depend on the residence of the legal entity. This is useful if the added value comes from the production of physical goods. If the value lies in intangible services and intellectual property, this is a good recipe for abuse. For example, it is estimated that 40% of global “foreign direct investment” investments are constructed for tax cuts rather than actual business investments.
This invitation to cooperate with the system not only means that multinational companies will pay less taxes. It is lower than the lawmakers intended, but the government has also set a tax rate that is lower than they fear that these companies will transfer part of their income from their main sector to somewhere else.
The bank’s excuse is that they are regulated and taxed in the service market, but if this is the case, they will not be hurt by the redistribution of tax rules. In fact, they have a lot of losses: Devereux and Simmler found that the tax base for redistribution would be twice that of no bank split.
The government missed the opportunity to simplify the rules, creating fertile ground for smart new ways to circumvent its intentions. Instead of negotiating exceptions and thresholds, executives can negotiate the relative weights of investment, employment, and sales in a completely formula-based allocation. Total global profits from multinational companies, thresholds and benefits can be lowered over time, but actions cannot be taken to avoid future changes.
The United States calls on other countries to abolish unilateral taxes on digital data when they introduce new rules. This only makes sense, because it does not block the view of the framework. This should not be satisfied with what has been achieved. This is a big step for politicians. However, for the global economy, this is only the first step.