- General

G-7 Tax Reform Proposal Draws Fire from Smaller, Developing Countries

Smaller economies and developing nations are rallying behind a rival global tax reform plan to the one struck last week by the wealthy G-7 nations.

Under the agreement, the G-7 nations are backing a global minimum corporate tax of 15%, but smaller nations say the reform would harm their economies, if adopted across the world, and retard their recovery from the coronavirus pandemic.

They complain the reform, proposed by U.S. President Joe Biden as part of a bigger package aimed at curbing tax avoidance by large corporations shifting where their profits are taxed, will benefit only rich countries. They argue they should be allowed to offer corporate tax rates lower than the G-7’s earmarked minimum.

But G-7 finance ministers say that will just allow the continuation to a race to the bottom, where countries compete for multinationals’ business by reducing corporate tax rates.

Ireland’s prime minister Leo Varadkar said raising his country’s 12.5% corporate tax rate, would be “damaging to the national interest.” Other leaders of smaller nations say using tax rates to lure foreign investment is crucial for their economic well-being.

Many back a rival plan that the U.N. Tax Committee has been developing which focuses specifically on the digital giants and grants additional taxation rights to countries where the digital services are provided and where the revenue is generated as opposed to where the country is headquartered, enabling developing economies to capture more income, too. India, Argentina, Ecuador, Ghana, Nigeria and Vietnam are among the emerging economies favoring the U.N. plan, arguing it reflects the economic needs of developing nations.

“The G-7 change is, in part, about getting big companies to pay more tax, by closing off loopholes which allow them to shift profits around the world. But behind all the fine words is also a desperate scramble by countries to generate revenue for their own exchequers, in the wake of a massive COVID-19 hit,” complains business commentator Eoin Burke-Kennedy in a commentary for the Irish Times.

The G-7 proposal follows mirrors the lines of a reform the Organization for Economic Co-operation and Development — a 38-strong forum of mainly high-income countries — has been advocating for years that would see multinationals pay a greater proportion of tax in those countries where they earn profits and establish of a minimum global tax rate. But that would put a squeeze on smaller entrepreneurial nations, and not just those that are largely viewed as brazen tax havens, say opponents.

G-7 finance ministers hope last week’s summit will add momentum for upcoming tax talks planned with 135 countries in Paris and for a meeting of the Group of 20 countries in Venice next month. Under the G-7 proposal companies would pay the bulk of their taxes in the country where they are headquartered, even when profits, labor and the raw materials used are sourced from developing countries. Much of the proposal focuses on 100 of the world’s leading companies.

U.S. Treasury Secretary Janet Yellen said the G-7 proposal guarantees greater equity. “That global minimum tax would end the race-to-the-bottom in corporate taxation and ensure fairness for the middle class and working people in the U.S. and around the world,” she posted on Twitter.

But that isn’t the view of several smaller European governments, who for years have been fending off efforts by the European Union to establish a corporate tax minimum for member states and whose opposition has not diminished. Hungary’s prime minister, Viktor Orban, has ridiculed the tax proposal.

“I consider it absurd that any world organization should assert the right to say what taxes Hungary can levy and what taxes it cannot,” Orban said at a recent press conference. Hungary has a 9% corporate rate, the lowest in the EU, which has helped the country attract foreign investment, say Hungarian officials. They say a global minimum tax rate would likely impact 2,000 to 3,000 major companies in Hungary.

The Polish government has also expressed opposition, largely on grounds of national sovereignty. The country’s corporate tax rate is 19%, well above the proposed minimum, and it has spoken out in recent years against tax havens and digital giants escaping tax.

But Polish finance minister Tadeusz Koscinski told the Financial Times last week that Warsaw does not want the G-7 “dictating what tax rate we have in our country.” The Poles have also suggested domestic companies should have a waiver on a corporate tax minimum. “We don’t support the idea of a minimum tax on the profits companies make in Poland on business in Poland,” he said.

Ireland has been the most forward-leaning in voicing opposition. Irish finance minister Paschal Donohoe has complained smaller nations don’t have the same capacity for scale as the larger economies do.

The African Tax Administration Forum, an advisory group for African governments, says there should be a tiered approach in which minimum thresholds could be set at lower levels for smaller economies. “We don’t think a single threshold for all economies is equitable,” it said in a statement. The strength of the opposition to the G-7 proposal suggests it will be hard to get a sign from the G-20 next month or from a majority of the 135 countries meeting soon in Paris, say finance-sector observers.

Source: Voice of America