Editorial: Worldwide tax reform can counteract the darkish facet of globalization
The international tax reform has taken an important step forward. Following the agreement reached by the Finance Ministers of the Group of Seven (G-7) in June, the Organization for Economic Co-operation and Development (OECD) recently announced that 130 out of 139 countries and jurisdictions participating in their tax reform negotiations had issued a joint statement that specifically supports the introduction of a minimum global tax rate of at least 15% and ensures that large multinational corporations (MNCs) pay taxes where they operate and make profits. The signatory states include China, India and other emerging economies. The 130 countries and jurisdictions represent more than 90% of global GDP. The OECD also indicated that the remaining technical work and the plan for the tax reform framework is expected to be completed by October this year and effectively implemented in 2023.
The deepest international tax reform in a century is nearing its final phase. The international negotiations on tax reform have been going on for more than a decade and are at a dead end. In recent years, given the gradual change in attitudes of a large number of countries, particularly the United States, negotiations have gotten well on their way. International tax reform is not just about taxes, it is also about global governance rules; in essence, it is the reflection and need for economic integration. Even if globalization cannot be stopped, it is accompanied by longstanding dissatisfaction. Unilateralism, protectionism and populism have been rampant since the global financial crisis, leading to the partial decline of globalization. In this context, broad support for international tax reform strengthens globalization and marks its self-correction. The steady progress of economic globalization and multilateralism is inextricably linked with the adjustment of tax regulations. In other words, the international tax reform not only meets the needs of economic integration, but also serves as a shepherd.
The international tax reform has a special background. Since the 1980s, countries around the world have adopted tax cuts as the common political choice, resulting in a “race to the bottom” in corporate tax rates. This global race is not useless to the growth and prosperity of countries, and it can also encourage institutional competition between countries. However, the countries inevitably get into a competition that can lower their tax rates the most. To make matters worse, MNCs, especially certain Internet giants, arbitrage between different tax systems in different countries in order to evade taxes by transferring profits via so-called “tax havens”. While this is a rational choice for companies wanting to serve their own interests, it harms the international community. According to estimates by the OECD and a group of experts from the United Nations, the total loss of tax revenue from tax avoidance by global MNCs amounts to hundreds of billions of dollars each year. This “race to the bottom” violates any notion of tax justice, widening the gap between rich and poor and increasing the losers’ dissatisfaction with globalization.
Therefore, the abolition of irrational tax policies has become a common desire of countries around the world, despite different reasons for supporting it. This shared desire is the basis for a breakthrough in global tax negotiations.
The international tax reform plan comprises “two pillars”. The first will ensure that MNCs – especially tech giants like Google, Apple, and Facebook – pay their fair share in the markets in which they do business and make profits. It will also ensure a more equitable distribution of the profits of MNCs to the governments of the countries in which they make those profits, regardless of whether they are physically present there. The second pillar aims to regulate financial and tax competition between countries by introducing a global minimum corporate tax. The OECD estimates that a minimum global corporate tax rate of at least 15% will generate around $ 150 billion in additional tax revenue for countries annually. The planned reform also aims at “tax havens” in order to put an end to this “race to the bottom”.
We need to understand the truth about international tax reform. It is primarily intended to correct a discrepancy and to endeavor to restore tax justice worldwide. Although the tax reform will increase the tax burden on multinational corporations, special emphasis will be placed on adjusting the structural tax burden rather than just increasing the tax. In a time of populist sentiment, the international community should avoid the notion that “it is better to impose higher taxes on MNCs” as excessively high tax rates stunt economic growth, thereby reducing tax revenues and affecting the well-being of everyone. With every tax reform, there is always a balance to be found between efficiency and equality.
The Chinese government’s signing of the International Tax Reform Declaration is clearly based on a carefully considered strategic judgment. In the current international environment, it is of particular importance as it shows that China, the greatest beneficiary of globalization, is determined to “win cooperation through confrontation, open doors instead of closing them, and focus on mutual benefit rather than zero-sum games . “It is widely believed that the introduction of a global minimum corporate tax rate will not have much of an impact on China. Some have concerns about the real tax burden on high tech companies, but exceptions can be sought through negotiation. In general, China’s active participation in negotiations and consultations is conducive to adapting to the new trend in international tax reform at an early stage and turning passivity into initiative.
The introduction of international tax reform also offers China a rare opportunity to advance its own tax reform plans. In the past, the pursuit of competitive tax cuts around the world unfolded across China with the same logic: local governments tried to introduce explicit or covert tax breaks and preferential policies. This vicious competition, based solely on low tax rates or preferential measures to encourage investment, allegedly attracted or withheld investment while actually undermining tax equity, which in the long term was detrimental to the development of all regions. Instead of tax policy, it is things like a region’s business environment, industrial chain, and infrastructure that actually attract investment. China should use the international tax reform to strengthen its national governance capacities, improve the tax system and rehabilitate local tax policies. To this end, promoting fairness in the domestic tax system should be a priority.
Regardless of people’s political and economic beliefs, they cannot ignore the problem of global income inequalities. Tax evasion MNCs have long been the target of public criticism. Unchecked, this phenomenon will definitely undermine globalization. International tax reform is expected to turn globalization for the better. However, it should also be noted that the consensus on the international tax reform plan is only the first step in reforming the global tax system and there is still a lot of technical work to be done. Even if the plan is implemented as planned in 2023, the political coordination and exchange of information between countries will continue to be subject to an international political and economic situation in which disputes and friction will arise. This breakthrough is well worth celebrating, but there is still a long way to go.
Download our app to get breaking news and read the news on the go.
Get our weekly free must-read newsletter.
You accessed an article that is only available to subscribers