Long Overdue Global 15%Tax Rate Bare Minimum, But It's A Start

- Murray Horton

The vexed issue of transnational corporations (TNCs) not paying their fair share of tax (or, indeed, any tax at all) in the countries in which they operate - including New Zealand - is one which Watchdog hasn't looked at for a while. It was the cover story in issue 147 (April 2018, "Taxing Times For Transnationals? We Live In Hope", Murray Horton) but then there has been no further mention for the next three years. There was a good reason for that silence.

Not, unfortunately, because the TNCs suddenly became good corporate citizens and started paying their taxes. No, it was because remedial action had been promised at the global level (the best way to deal with TNCs) but was a long time coming. The TNCs most involved in this global tax dodging are the digital behemoths - Apple, Amazon, Facebook and Google, the 21st Century equivalent of the railway barons and oil barons of the 19th and 20th Centuries.

OECD Action Plan On BEPS

I refer you to my above cited article for the background up until 2018. Here are a couple of extracts to set the scene: "International action by states is the only way to deal with transnational corporate tax dodgers. In September 2014 the Organisation for Economic Cooperation and Development (OECD) released seven recommendations for its Action Plan on Base Erosion and Profit Shifting (BEPS)".

"They included improved transfer pricing requirements and preventing the abuse of double tax agreements (transfer pricing refers to the prices TNCs set when they charge their local subsidiaries for centrally-provided services such as accounting and marketing. It enables the TNC to declare a loss in a country with a higher tax rate and its profit in a country with a lower one). New Zealand is a member of the OECD, so the then (National) government said it would wait until BEPS came into effect, as part of a coordinated international response".

Even National got sick of foot dragging and obstruction by the TNCs. In December 2016 "the Government announced that it was considering taking unilateral action against TNC tax dodgers, rather than waiting for the OECD's multilateral BEPS process to come into effect... That was as far as things went under National, which finished its nine years in power at the 2017 election... The new Labour-led government introduced the Taxation (Neutralising Base Erosion and Profit Shifting) Bill in December 2017 to tighten up measures against TNC tax dodging. This Bill was drawn up by officials under the National government and Labour is following on from what National was already doing. There is a bipartisan consensus on this subject".

Stuart Nash, the new Revenue Minister, said: "'The days of organisations being able to structure themselves so they either don't pay tax or pay very little tax on the profits they earn are over'. Past practices had been 'immoral', he added. Nash said the work being done in New Zealand and by the OECD was only ‘phase one. There are a whole lot of other work streams that will go on, not only in New Zealand but across the OECD. People are already working on 'phase two'" (Press, 27/12/17, "Minister Hopeful Over Multinational Tax", Tom Pullar-Strecker)".

That new law duly came into effect but that was as far as it went in terms of little old NZ taking on the digital giants, in particular, over their tax dodging. This involves a not insignificant amount of money. A November 2020 report by the international lobby group, the Tax Justice Network, calculated that New Zealand loses $577 million per year through global tax evasion, primarily through profit-shifting by TNCs.

My 2018 article ended thus: "Things suddenly changed in March 2018. The OECD released a report deferring the BEPS initiative until 2020, saying that it hopes to broker an agreement between the 110 countries that had become involved in the process (many more than the OECD's actual membership). This promptly led to some major countries deciding to take unilateral action. India has already imposed a 6% 'equalisation tax' on digital advertising sold by Google and Facebook. The European Commission (EC) announced it will impose a 3% tax on the revenues of TNCs such as Google, Facebook, Amazon, Twitter, Uber and Airbnb".

"Both the Indian and EC measures break from the previous practice of taxing TNCs only on their profits generated in the host country - these new measures will tax those TNCs' revenues, potentially increasing their tax bills by billions of dollars each. The underlying principle of these new measures is recognition of the contribution that users make to the profits of 'weightless' digital businesses".

"The EC announced that this 3% tax is an interim step, pending a longer-term measure. The New Zealand government said that it was awaiting advice from officials on whether it should also introduce similar 'interim measures'. At long last, governments are starting to assert themselves in this global power struggle between nation states and 'stateless' transnationals".

2021: Sting In Tail Of G7 Deal

That's where things stood until June 2021, when the Group of Seven (G7, the world's richest economies) agreed on a deal to squeeze tax havens and back a global minimum corporate tax rate of 15%, to end what the Biden Administration called a race to the bottom on global taxation. G7 Finance Ministers, meeting in London, also endorsed proposals to make the world’s biggest TNCs - including the digital behemoths - pay taxes in countries where they have lots of sales but no physical presence.

But - of course - there is a sting in the tail. "France had launched debate over the issue by imposing its own digital services tax on revenues it deemed to have been earned in France by companies such as Google, Amazon and Facebook. Other countries have followed suit. The US considers those national taxes to be unfair trade measures that improperly single out American firms".

"Part of the agreement is that other countries would repeal their unilateral digital taxes (my emphasis) in favour of a global agreement" (Stuff, 6/6/21). The G7 also proposes to allow countries the right to tax 20% or more of local profits exceeding a 10% profit margin, which has been described as an extra tax on super-profits.

"The other main part of the proposal is for countries to tax their home companies' overseas profits at a rate of at least 15%. That would deter the practice of using accounting schemes to shift profits to a few very low-tax countries because earnings untaxed overseas would face a top-up tax in the headquarters country" (ibid.). In the US, President Biden is proposing a 21% tax rate on US companies' overseas earnings (it used to be 28%; President Trump cut it to 10.5%-13.25%).

The proposed 15% minimum tax rate doesn't stop NZ taxing the local subsidiaries of the likes of Microsoft and Google at its' company tax rate of 28% (it used to be over 30%). But if a low tax country like Ireland continues its 12.5% company tax rate, it will have to increase it to 15% - although the extra 2.5 percentage points of tax would be collected in the country where the TNC is based, invariably the US.

Ireland has long been the TNCs' best friend. "Ireland had granted lavish tax breaks to Apple over several years, with the tax rate on its European profits dropping from 1% in 2003 to just 0.0005% in 2014" (Stuff, 31/8/16). No surprise then that Ireland does not intend to sign up to the G7 proposal.

One thing needs clarifying. This proposed global minimum tax rate won't apply to all TNCs, only those with a turnover of more than €750 million ($NZ1.26 billion) a year, as they have been the focus of the OECD tax talks to date. So, only the biggest of the big boys then, not your common or garden TNC. But it is more likely to come into effect than are unilateral proposals from individual countries.

"The problem for any country that wanted to ignore the proposal and go its own way by imposing its own revenue tax on transnationals, such as the digital services tax proposed by the New Zealand government (in 2019), is that they would probably be breaking either tax treaties or World Trade Organisation rules" (Stuff, 8/6/21).

Getting Deal Signed Into US Law No Guarantee

"Since one of the main conditions is that the tax will be levied only on profit above 10%, this would exempt Amazon, which - while it somehow managed to make Jeff Bezos very, very rich - also arranges its books to show slim profit margins and extensive reinvestment in technology that keeps its profit levels (nominally) at around 6.3%. Other firms will be looking admiringly at Amazon for inspiration on how to achieve similar ends".

"There are other reasons for holding the champagne. As Joseph Stiglitz recently pointed out, the global average corporate income tax rate fell from 49% in 1985, to 24% in 2018. The G7 move cements in this downward trend. That trend may also help to explain why some countries (e.g., France) have imposed digital taxes targeted at the likes of Google and Facebook, but the US has made it clear that these taxes would have to be scrapped once the 15% global rate is adopted. That may explain why the Biden Administration has been driving the 15% corporate global rate so hard".

"Until recently, President Biden had seemed more intent on taking the US corporate tax rate back up to the 28% it was sitting at in 2017. Yet, in the face of the opposition by the Republicans and by the Rightwingers within the Democratic caucus, it seems unlikely that any tax hike (or any new tax at all), would survive a Senate vote. So, Biden's embrace of a 15% global tax rate has to be seen as part of that backdown, especially given that - as mentioned - it would scrap the digital services taxes being imposed unilaterally by France and India. Biden is also framing the global tax as a way to fund a bipartisan infrastructure package. It still looks like being an uphill battle".

"In the Trumpian aftermath of rampant USA! USA! nationalism, Biden will also struggle to get the global tax through a Congress that's already being incited by Fox News to treat the global corporate tax as the modern equivalent of the Old World's tea tax of 1776 that sparked the American Revolution. Patriots, resist this foreign tax! And a pox on those traitors in high places, who would seek to impose it on the American people! Etc, etc" (Gordon Campbell, Werewolf, 8/6/21, "Taxing The Global Dodgers"). Gordon Campbell's conclusion was that this agreement, despite its many limitations, marked a most welcome shift in attitude after decades of neoliberalism.

In July 2021 the OECD threw its weight behind the G7 proposal, meaning that 130 countries back it (it has grown from the 110 that were involved in 2018, and is far more than the OECD's 38 actual member countries, of which New Zealand is one). Most importantly, those signing on include all of the Group of 20 countries (G20, the world's 20 richest economies), such as the US, UK, China and France.

Deal Will Kill Off Idea Of NZ's Digital Services Tax

Ireland and Hungary, both with low corporate taxes, were among nine countries involved in the OECD discussions which have not joined. The OECD announced that a detailed implementation plan will be finalised by October 2021 and the proposal is expected to come into force in 2023. Implementation will depend on action at national level, by incorporating the minimum 15% global tax rate into national laws. Other parts of the proposal could require a formal international treaty.

"Countries have also signed up to new rules on where the biggest transnational companies are taxed. They would see taxing rights on more than $US100bn of profits shift to countries where profits are generated (such as NZ. Ed.). rather than where a business might have its headquarters. If the deal worked as planned, however, it would still reach countries that did not join".

"The agreement includes a 'top-up' provision, so that a parent company would get an additional bill if a subsidiary paid less than the minimum" (RNZ News, 2/7/21). The OECD said that the proposal could globally generate about $US150 billion in additional tax revenues per year. New Zealand analysts said that it will kill off any idea of NZ implementing its own digital services tax.

Whether any such proposal will make it into US law is very much an open question. Biden has a razor thin majority in Congress and the Republicans control the Senate, which has to ratify any international treaties. The Republicans, and Rightwing Democrats, are allergic to anything that they can misconstrue as tax increases.

"Republicans in the Congress have expressed opposition to the measure. Representative Kevin Brady of Texas, the top Republican on the tax-writing Ways and Means Committee, has blasted the OECD deal, saying: 'This is an economic surrender to China, Europe and the world that Congress will reject'" (Stuff, 11/7/21).

"Under the minimum, companies that escape taxes abroad would pay them at home. That would eliminate incentives for using tax havens or for setting them up. From 2000-18, US companies booked half of all foreign profits in seven low-tax jurisdictions: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland" (ibid.).

Digital Giants Throwing Weight Around, Need Reining In

This international proposal is a starting point but a 15% global corporate tax rate really is a bare minimum. Oxfam, for example, has expressed disappointment that it was not set at 25%. But it marks the start of doing something about the TNCs that are both stateless and, in many cases, bigger than actual states (such as NZ). The digital giants have not been averse to throwing their weight around recently in our part of the world - in February 2021 Facebook stripped all Australian-generated news content from all its pages in protest against Australia's News Media Bargaining Code which will require Facebook and Google to pay Australian news outlets for running links to their articles.

Facebook didn't care who it hurt in the process: "To make matters worse, when Facebook pushed the button on its news ban, it botched the process. Non-media agencies including state health departments gearing up for Australia's Covid-19 vaccine rollout and the Victorian Police saw their Facebook posts disappear too" (Listener, 6/3/21, "Fickle Friend", Peter Griffin). Facebook recognised this was a public relations disaster and quickly reversed the ban.

But this illustrates vividly the contempt that these digital TNCs have for states, and the State in general, and for the billions of ordinary people who have made billionaires of the owners and CEOs of these companies. At least attempting to make them pay any amount of tax is a step in the right direction. They've had it far too easy for far too long. I say, squeeze them until the pips squeak.


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