The G7 has once again put multinationals’ profits over the interests of people | Joseph Stiglitz, José Antonio Ocampo and Jayati Ghosh
The US Treasury just made a deal with the other G7 countries that global minimum taxes that were already agreed upon will not apply to American companies. The G7 governments caved under intense pressure from President Donald Trump and lobbying from multinationals in Washington, London, Brussels, and beyond – just as India, and now, sadly, Canada have caved on digital taxation.
Years ago, the international community recognised that too many global companies were not paying their fair share of taxes, and some weren’t paying taxes to the country where the economic activity actually occurs. The complex agreement that emerged in 2021 at the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting comprised two pillars; only Pillar Two, a global minimum corporate tax, has been adopted. (The other pillar allocated taxation rights among countries and spurred opposition from developing countries and the US.)
While there has been a global consensus on the need for such a minimum, the version the US adopted during Trump’s first presidential term was different, and weaker, than that of the rest of the world, allowing multinationals to “make up” for what they didn’t pay in tax havens with the “extra” they paid in the US or other high-tax jurisdictions.
While far from perfect, Pillar Two was a first attempt to ensure a minimum tax rate of 15% on the profits of multinationals everywhere, a crucial step to end harmful tax competition between countries.
There were, of course, some carve-outs and exemptions, which lowered the effective rate somewhat below 15%. And the 15% rate was already lower than the rate imposed by many developing countries; it should have been higher, and the carve-outs smaller. Still, the Pillar Two deal halted the race to the bottom, whereby countries offered lower tax rates to attract businesses to their jurisdictions. For the world as a whole, this race didn’t generate much new investment; the real winners were the rich corporations who pocketed the savings from paying almost no taxes at all in some countries.
But once again, G7 governments have decided to put multinationals’ interests before the interests of developing countries, small and medium-size businesses (which can’t avail themselves of the shenanigans that multinationals have found so profitable), and their own citizens – who, as a consequence, will pay higher taxes. By exempting US multinationals from Pillar Two, this deal will allow some to continue to benefit from zero or near-zero taxes on profits they book in low-tax jurisdictions or tax havens such as Puerto Rico and the Cayman Islands. This will make them more competitive than non-US multinationals. Because modern multinational corporations are willing to move their nominal headquarters to wherever they get the most favourable tax treatment (and other goodies), with the real economic activity occurring elsewhere, giving US companies preferential treatment incentivises companies to move their official headquarters to the US. This is another sad example of a race to the bottom.
By acceding to US demands, the G7 deal risks undermining the worldwide implementation of the minimum tax. It also makes a mockery of the inclusiveness of the OECD/G20 Inclusive Framework.
There was a pretence that the new global framework was crafted by more than 140 countries working together. To be sure, many developing countries complained this was an unfair agreement for them and that powerful countries did not listen to their concerns. Now that facade has crumbled. The non-G7 countries, including dozens of emerging markets and developing countries, are now being asked to rubber-stamp a decision imposed on them by just one country.
Pillar Two should be strengthened, not gutted. It currently applies only to large multinationals (with a global turnover at or above €750m), and the global minimum tax rate of 15% is set very low. The Independent Commission for the Reform of International Corporate Taxation has always advocated a minimum rate of at least 25%.
According to some estimates, Pillar Two’s minimum tax would have yielded between $155bn and $192bn (£112bn-£140bn) annually in additional global corporate income tax revenue. While this is a significant amount, a minimum rate of 25% could generate more than $500bn a year in additional revenue. In a world facing converging crises of inequality, climate change, and underfunded public services, leaving such substantial resources on the table is fiscally irresponsible and morally indefensible.
Pillar Two represented a starting point – a global floor on corporate taxation that could have curbed the race to the bottom and restored some degree of tax justice. The G7’s decision to let US multinationals off the hook weakens even that modest floor and sends the wrong message to the rest of the world.
Just two weeks ago at the UN, there was a global consensus about the need to strengthen international tax cooperation and to implement progressive tax systems, and a large majority of countries voted for and support ongoing negotiations toward a UN framework convention on international tax cooperation. But the US government recently walked away from the UN negotiations, stating that the goals of the proposed UN convention “are inconsistent with US priorities and represent an unwelcome overreach”.
In the adoption of the “Compromiso de Sevilla,” the outcome document of this week’s UN Fourth International Conference on Financing for Development (FfD4), the US was the only major country that was absent. Allowing the US to bypass the already modest Pillar Two rules not only undermines multilateralism; it also flies in the face of the commitments that have been made, and further deepens the inequity in global tax governance.
The members of the OECD/G20 Inclusive Framework should reject the deal made at the G7. The US must not be allowed to dictate global policy. It is powerful, but still represents less than 20% of global GDP.
Countries meeting in Seville for FfD4 can either accept the US undermining every effort to ensure multinationals pay their fair share, or redouble efforts to create a new international tax system at the UN that works for all. For the sake of the world economy and people everywhere, they should do the latter.
Joseph E Stiglitz is a Nobel laureate in economics, a university professor at Columbia University and a former chief economist of the World Bank.
José Antonio Ocampo is professor at Columbia University and former finance minister of Colombia.
Jayati Ghosh is professor of economics at University of Massachusetts Amherst.
Ⓒ Project Syndicate
