Global multinational minimum tax weakened by loopholes
The global minimum tax of 15% on multinationals, which raised high hopes in 2021, has been dramatically weakened, according to a new report from the EU Tax Observatory. The report, Global Tax Evasion Report 2024, said that while the move was initially expected to increase global corporate tax revenues by close to 10%, a growing list of loopholes has reduced its expected revenues by a factor of two.
The report states: “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: less than 5% of global corporate income tax revenue, as opposed to 9% with a 15% rate and no loopholes, and more than 16% with a 20% tax rate.”
It goes on: “Even more worrying, the global minimum tax still allows for a race-to-the-bottom with corporate taxes (and may reinforce it) because it allows firms to keep effective tax rates below 15% as long as they have sufficient real activity in low-tax countries. This exemption – a carve-out for economic substance – provides incentives for multinational companies to move production to very low-tax countries – and in turn incentives for tax havens to keep providing rates below 15%.”
According to the EU Tax Observatory, a “persistently large amount of profits” is shifted to tax havens, totalling $1trn in 2022, equivalent of 35% of all the profits booked by multinational companies outside of their headquarter country. It says US multinationals are responsible for about 40% of global profit shifting, and continental European countries appear to be the most affected by this evasion.
Profit shifting shows little sign of abating despite ambitious policy initiatives, the report notes. In 2015, the OECD launched the Base Erosion and Profit Shifting (BEPS) and in 2017, the US introduced measures to reduce profit shifting by US multinational companies (while cutting its corporate tax rate from 35% to 21%).
“Yet seven years after the start of the BEPS process and five years after the US law, global profit shifting appears to have changed only marginally,” the report states. “The global loss of tax revenue due to this shifting appears to have stagnated at about 10% of corporate tax revenue collected. This is not to say that the policy initiatives of the last decade have had no effect: absent these policies, profit shifting may have been even higher today.”
The report makes a number of proposals, including a reform of the international agreement on minimum corporate taxation to implement a rate of 25% and remove the loopholes in it that foster tax competition, and the implementation of unilateral measures to collect some of the tax deficits of multinational companies and billionaires in case global agreements on these issues fail.
According to the report, a strengthened global minimum tax on multinational companies, free of loopholes, would raise $250bn per year. It also recommends a global minimum tax on billionaires, equal to 2% of their wealth, estimating that it would raise close to $250bn (from fewer than 3,000 individuals) annually.
