In October 2021, G-20 leaders finalized a new global tax treaty aimed at curbing tax evasion by large multinational enterprises (MNEs). The agreement was brokered by the Organization for Economic Co-operation and Development (OECD) and ratified by 137 countries and territories (collectively called the group). Inclusive framework Or IF) Represents the most significant global tax reform of the decade. Among other features, the “IF Agreement” introduces new tax rights regardless of the physical location of an MNE and a new global minimum corporate income tax of 15 percent on the largest MNE.
The IF Agreement consists of two main pillars (Table 1): one pillar establishes new tax rights on a subset of large multinational companies (including ubiquitous digital giants such as Amazon, Google, and Facebook), and the other two pillars establish rates, rates and procedures. . For a new global minimum corporate tax (GloBE).
Table 1. New IF Global Tax Agreement at a Glance
Source: Data drawn from OECD / G20 Base Erosion and Profit Shifting Project “Two Pillar Solutions to the Tax Challenges arising from the Digitization of the Economy”, October 21, 2021 and BEPS 2.0: All you need to knowKPMG.
A missed opportunity to increase development finance
Almost all stakeholders seem to agree that the IF Agreement represents a practical step in trying to reduce a “downward race” in global tax competition and refinement MNE taxation to better reflect the actual activities, sales and staffing of enterprises. By moving closer to a formulaic approach to global corporate tax allocation-instead of pretending to be a completely independent business of subsidiaries and affiliates উভ both critics and fans alike support the IF agreement’s approach, which seems to be moving away from traditional residential rules in an increasingly complex and digitalized world.
Unfortunately, when it comes to creating meaningful revenue benefits for the Global South, low- and middle-income countries (LMICs) are rightly alienated from the G-7 consensus that the IF Agreement offers a “fair solution” to redistribute taxing rights worldwide. While the G-7 countries have hailed the IF agreement as a step towards “ending the race for corporate taxation” worldwide, LMICs have expressed frustration and concern over the various inequalities embedded in the agreement – including Kenya, Nigeria, Pakistan and Sri Lanka’s refusal to sign. Currently, only 23 African countries are among the 137 countries and territories that are set to implement the global agreement – less than half of all countries and territories – and many LMICs are being warned to reconsider implementing the agreement.
Concerns include the first choice of high-income countries to collect additional “top-up” taxes on MNEs, lower minimum tax rates, creating a “run down” on corporate income tax rates, and forcing LMIC to abandon existing and future digital services. Tax MNEs in exchange for a new formula-based method of redistributing profits that could weaken their revenue base (Table 2). For the new GLOBE, the current Formula One G-7 will provide countries বাড়ি home to only 10 percent of the world’s population 60 an estimated 60 percent of the $ 150 billion new tax revenue. In fact, LMIC is being asked to make a blind leap of faith by signing a legally binding agreement to waive the right to pay certain taxes in exchange for completely uncertain, and potentially damaging, revenue results.
Table 2. Summary of the main LMIC concerns with the IF Agreement
Source: Author’s analysis.
Political headaches in implementing the IF agreement
There are real political challenges to adopting the IF agreement in the main OECD judiciary, especially in the United States, where the move faces opposition from Republicans and may require two-thirds Senate approval to pass. EU tax legislation requires the unanimous support of 27 member states, and there are several smaller low-tax countries, such as Estonia, Poland and Hungary, who are reluctant to move on the global minimum tax (column two and US priority) unless the EU gives equal priority to digital tax reform. (Column one and a slow motion). Last month, Poland vetoed the EU’s latest attempt to approve a new global minimum tax on this basis. This ongoing stalemate calls into question the overall fate of the IF agreement.
What will happen next to LMIC in global tax governance?
As the IF treaty faces potentially serious political challenges to implementation, it is best for LMICs to maintain their distance and refrain from taking steps to implement it on their own in the near term. This is especially true when it comes to eliminating existing or planned digital services taxes, as the United States and Europe are pressuring them with the potential for sanctions.
In an optimal case, the IF Agreement will help LMIC create a more permissive environment and momentum for them to introduce their own more aggressive anti-evidence measures, including revising their tax system to remove incentives and introducing minimum taxes with less legal threat. MNEs or steps from their own country. Similarly, frustration with the components and process of the IF Agreement seems to be driving the pace of broader global tax reform, including a more equitable way to engage LMIC as an equal stakeholder in a potential UN convention and tax governance debate. The G-20 may also have room for rescheduling the IF agreement as a preliminary “draft” and may be committed to reorganizing key sections with IF partners and resolving LMIC concerns over the next few years.
Significantly, the recent discussions at the IMF / World Bank’s spring meeting on additional assistance to the LMIC in tackling the economic crisis, loans, debt relief, and innovative financing, highlighted the importance of consolidating internal resources and, in particular, the importance of global tax regime. Correction. It is as if the G-20 donors, the international financial institutions and the private sector have all indirectly agreed that the IF Agreement and the (seriously less meaningless) Addis Tax Initiative have checked that box and there is no need for LMIC to do anything else. . There can be no more than this truth.
Going forward, the ongoing political debate over the merits and evolution of the IF Treaty cannot be left in the lurch — they must be deeply integrated into the broader multilateral dialogue on economic recovery, poverty reduction, and financial support for the Global South.