US-backed global minimum tax will not stop transnational shenanigans
Jaco Oelofsen | BusinessDay | 03 May 2021
Their profits are not made in New York offices but through exploitation of the poor in developing countries
As details of US President Joe Biden’s New Deal continue to unfold, it would seem that the winds of change blowing in the West might bring some welcome changes elsewhere too. According to the recently announced Made in America Tax Plan, the US will soon be putting its weight behind a proposal for a global minimum corporate tax rate with the aim of tackling transnational corporate tax dodging.
This proposal comes on the back of growing international recognition that the power of transnational corporations has swelled to surpass the capacity of many states to rein them in. Today they enjoy a system of highly favourable international laws that has become known as the “architecture of impunity”, allowing them to remain essentially stateless and untouchable, even when their economic footprint exceeds that of entire countries. This includes the freedom to operate out of tax havens — low or zero-tax jurisdictions where wealth and profits are often “offshored” to avoid tax in other countries.
For the developing world this state of play has meant the profits of these corporations rarely trickle down to those states that have handed over access to their nonrenewable mineral resources. According to the UN Conference on Trade and Development (Unctad), at least $88.6bn leaves the African continent each year in the form of capital flight, of which about $50bn can be traced to trade mis-invoicing, transfer mispricing and other forms of tax-dodging by transnational corporations. This systemic outflow of profits contributes to shrinking tax bases, increasing public debt and worsening inequality in countries such as SA — a perpetuation of the old “resource curse” in a different form.
In this context the US’s backing of a global corporate minimum tax sounds like a cause for celebration, especially for those of us in the Global South. However, as always the devil lies in the details.
The notion of a global minimum tax rate is not new. In 2013 the Organisation for Economic Co-operation and Development (OECD) launched its Base Erosion and Profit Shifting (BEPS) Project, in the hope of comprehensively reforming the international tax system to address issues of corporate tax evasion, economic digitalisation, and co-operation among international tax authorities in the 21st century. One of the key proposals of the OECD’s BEPS Project is the idea of a global minimum tax. This is the same proposal now supported by the US.
The OECD proposal aims to set a minimum or floor for effective corporate tax rates across countries, with the current proposed minimum being about 12%. However, this does not mean all countries will be obliged to set their corporate income tax at 12%. Instead, any corporate income that is declared in a jurisdiction with a lower tax rate than the minimum will be subject to a top-up tax until the tax on this income has reached 12%. For example, if a company declares R100m income in a country with a 10% tax rate, the proposal would subject R2m (2%) of this income to a top-up tax so that the total tax is equivalent to 12%.
This newly taxed income also won’t go to the tax haven in question. Instead, it will be allocated from a top-down basis, with first taxing rights belonging to the country in which the company’s headquarters or parent entity is situated. In theory, this should diminish the incentives for transnational corporations to shift their profits to tax havens, as these profits will just be taxed in their home country instead.
But the problem with this proposal is that profits are not made in the New York offices of wealthy transnationals. Instead, real productive activity takes place at the bottom of the ownership chain. It is in developing countries that the subsidiaries of transnational corporations own the mines, process the minerals and send them abroad. Without this first step there would be no profits to hide.
Tax evasion begins at the level of these productive subsidiaries. In SA, the case brought against chrome giant Samancor demonstrated how “bottom of the chain” subsidiaries can shift profits by, for example, paying huge sums of money to their sister or parent companies in tax havens for nonexistent goods and services. From the perspective of the larger corporate group, this means less income is declared in high tax areas, and more income is declared in low or no-tax areas. This not only deprives countries of desperately needed revenue but also allows local subsidiaries to claim poverty when it comes to wage bargaining or upholding environmental and community commitments.