Nigeria: The Proposed Global Minimum Tax Rate - A Game Changer?

Introduction

For so long, multinational corporations (MNCs) have been criticized globally for employing several tax avoidance tactics that exploit the gaps and mismatches in tax rules. The Organization for Economic Cooperation and Development (OECD) has been coordinating tax negotiations among 140 countries over the years in order to reform global tax rules on cross-border digital services and curb tax base erosion by imposing a global minimum tax rate on big corporations. In September 2013, OECD and G20 countries endorsed a 15-point Action Plan for the purpose of addressing base erosion and profit shifting (BEPS). The Action Plan is made up of 15 specific measures together with 3 pillars, which are: "introducing coherence in the domestic rules that affect cross-border activities, reinforcing substance requirements in the existing international standards, and improving transparency as well as certainty." These measures are, therefore, geared towards addressing tax avoidance and profit shifting by multinationals, as well as improving the coherence and certainty of global tax rules while ensuring a more transparent tax system. OECD and G20 countries recognized that the coordinated implementation of the solutions proposed in the BEPS package, as well as the widespread participation of developed and developing countries, would be critical in reducing base erosion and profit shifting. Thus, in 2016, the OECD established the OECD/G20 Inclusive Framework on BEPS which brings together over 135 countries on an equal footing, including 66 developing countries, as well as international and regional tax organizations. On 12 October 2020, the OECD/G20 Inclusive Framework on BEPS released blueprints on Pillar One and Pillar Two, which comprised proposed solutions to address tax challenges arising from the growing digitalization and globalization of the world economy. The "twin pillar" approach is geared towards addressing nexus and profit allocation challenges (Pillar One), as well as provide for global minimum tax rules (Pillar Two). In April 2021, the proposals were updated and simplified by the United States President Biden's Administration and formed the basis for political discussions on global tax challenges by the Group of Seven (G7).

In an attempt to prevent MNCs from shifting profits to low tax countries and tax havens to avoid paying corporate income taxes, finance ministers from the G7 countries recently reached a historic agreement, which allows countries to tax 20% of the profits of large and profitable multinationals with at least a 10% profit margin, as well as implement a global minimum tax rate of 15%. MNCs would be required to pay this amount regardless of where they are headquartered or the jurisdictions they operate. Although analysts predict that this agreement would add a level of certainty to the global tax system and serve as a revenue raising tool, several implications may arise from its implementation. In particular, low tax countries and tax havens, such as Ireland, which depend on tax revenue for development may lose a significant amount as a result of the global minimum tax. Also, since under the G7 agreement, the United States is expected to give up some taxing rights on overseas profits of internet giants domiciled in the country, there is doubt as to whether the agreement, which requires two-third majority votes to pass, would be passed by the US Senate that is evenly split between Republicans and Democrats.  Republican lawmakers have strongly shown their opposition to the minimum corporate tax rate and have argued that it has the potential of cutting the United States' economic competitiveness overseas and reducing the level of tax decision making to foreign countries. In addition, there is the argument that the proposed minimum tax rate of 15% is too low, as it is close to the rates imposed in low tax countries like Ireland and therefore reflects the desire of the G7 countries to protect their own multinationals as opposed to following the lead of the United States Biden's Administration, which initially proposed a global minimum tax rate of 21%.There is no doubt that the proposal will have some positive and negative implications on developing countries across the world when viewed from different perspectives. This article, therefore, examines the potential positive and negative impacts of the proposed minimum tax rate to the global economies.

Positive Implications

The global minimum tax no doubt provides several benefits and opportunities that may avail different nations across the world. It has been noted that a global minimum tax would end the decades-long race to the bottom in corporate taxation, while ensuring fairness for the middle class and working people around the world. In the wake of the COVID-19 pandemic, countries across the globe have suffered massive falls in tax receipts, and have had to borrow huge sums to prop up their economies. According to Vitor Gaspar, Director of the International Monetary Fund (IMF)'s fiscal affairs department, over the past year, countries across the world have spent an estimated amount of $16 trillion battling the coronavirus. He further noted that the bills spent on health care and economic support drove the average country's public debt from 83.7 percent in 2019 to 99% of gross domestic product in 2020. The dire economic situation resulting from the adverse impacts of the pandemic has led to the need for countries to increase revenue mobilization in order to provide public services and drive economic development and growth. A global minimum tax rate would, therefore, assist the crippling global economy to thrive, by levelling the playing field for companies and encouraging countries across the world to compete on a positive bases.

The need to reduce the shifting of profits by MNCs to tax havens has become of paramount importance. Recent studies have shown that about 40% of profits made by MNCs (which is about $650 billion) are being shifted to tax havens and that 10% of the world's largest MNCs are responsible for this activity. This results in a $200 billion loss in global tax revenue. Taxing the billions of dollars shifted to low tax jurisdictions and tax havens by MNCs at a 15% rate will no doubt yield a significant amount of revenue which will be spread out among different countries. Published estimates have shown that effecting a change to the way corporate taxes are collected could generate between $100 billion and $600 billion per year for countries. Also, by setting a global minimum tax rate, countries will have the opportunity to prevent further erosion of their tax base without causing severe damage to corporate activity. It has also been observed that a 15% global minimum tax would increase the legitimacy of corporate taxation. In addition, tax experts are of the view that the global minimum tax rate would benefit large and developing countries, such as India, which find it difficult to reduce corporate tax rates in order to increase foreign direct investments. Since the global minimum tax applies to MNCs that shift profits to no or low tax countries, experts suggest that India will not be affected in a major way. In fact, India, which is a big market for large numbers of tech companies, is expected to benefit from the 15% corporate tax rate since its domestic tax rate is higher than the threshold and would therefore not affect companies doing business in the country.

Although tax incentives to attract MNCs are likely to continue even after the introduction of a global minimum tax, as noted by the International Monetary Fund, the value of these incentives will decline since MNCs will only be able to reduce their liabilities to 15% and not zero. It is, therefore, safe to submit that imposing a 15% global minimum tax rate on MNCs is better than nothing.

Negative Implications

Despite the numerous benefits of the G7 agreement, the minimum tax rate of 15% could cause severe implications to low tax countries, like Ireland and Hungary, which depend largely on tax revenues for economic growth and development. Since the 1990s, Ireland has had a low corporate tax rate of 12.5% that has continued to attract the country to the world's largest MNCs, including tech giants and pharmaceutical companies. The low tax rate in Ireland has led to an influx of billions of dollars in investments from MNCs and a rise in the country's GDP growth despite the global economic downturn during the COVID-19 pandemic. The global minimum tax rate of 15% has the potential of causing major repercussions on the economy of Ireland, as it could make the country less attractive to MNCs and therefore lead to a fall in the country's tax revenue. Research shows that under the G7 minimum tax agreement, Ireland is likely to lose over ?2 billion which is a fifth of its annual corporate tax revenue. Consequently, the scale of economic damage would be substantial if MNCs decide to leave Ireland. According to an estimate projected by the country's Fiscal Advisory Council, the departure of half of the 10 largest multinationals could cost the government ?3 billion in tax revenues, and the loss of more than 10,000 jobs.

Also, tax justice campaigners have argued that the 15% minimum corporate rate is too low and therefore inadequate to stop the "race to the bottom". They argue that a 15% rate will generate 60% additional revenue flow to the G7 countries, thereby leaving very little for developing countries which are in dire need of revenue particularly in an era of a pandemic. Since under the G7 proposal, the bulk of the additional tax revenues may go to the home countries of MNCs and not to the source countries where they generate revenue, there is a very high chance that the wealthy countries will receive the majority of the taxable profits derived from the tax havens, while the poor countries will be left with the scraps. As aptly noted by Oxfam's executive director, Gabriela Bucher, "it's absurd for the G7 to claim it is 'overhauling' a broken global tax system by setting up a global minimum corporate tax rate that is similar to the soft rates charged by tax havens like Ireland, Switzerland and Singapore. They are setting the bar so low that companies can just step over it." Consequently, giving priority to the home countries of MNCs has the potential of reinforcing rather than reducing the unfairness that exists in the current global tax system.

There is no doubt that developing countries rely heavily on corporate tax revenue and have been more affected by the profit shifting of MNCs into low tax countries and tax havens. Research shows that developing countries lose hundreds of billions of dollars annually as a result of tax avoidance by multinationals. Since most African countries have corporate tax rates of 25 to 35%, it has been argued that global rate of 15% is simply too low and cannot lead to a significant reduction in profit shifting from the region. Tax justice campaigners are therefore of the view that the global minimum tax rate should be at least 21% as initially proposed by the United States or even a 25% rate as proposed by the Independent Commission for the Reform of International Corporate Taxation (ICRICTIt was found that, for selected developing countries like Brazil, India and South Africa, only an average of $1 billion would be benefited from the 15% tax rate. On the contrary, if the minimum corporate tax is raised to a 25% rate, it is projected that more than $1 billion can be generated in these selected developing countries. Brazil could generate $9 billion, India could generate $1.83 billion while South Africa could generate $3.65 billion.

The threat of a trade war may also affect the implementation of the G7 agreement especially if countries without digital tax agreements insist on keeping their digital services taxes in place. Several countries, including France, the UK, India, and Nigeria, have introduced unilateral measures that align with their policy considerations for the purpose of taxing digital multinationals with significance economic presence (SEP). Over the years, the United States has threatened to impose retaliatory measures on countries with digital services taxes against US-based multinationals, as it believes that the digital taxes discriminate against these multinationals and are inconsistent with international tax rules. The United States Biden's administration has recently vowed to impose tariffs on goods imported from Britain, India, Spain, Austria, Italy and Turkey in retaliation for their digital taxes. The retaliatory measures are, however, kept on hold until the global tax negotiations unfold. Consequently, countries that tax US-based multinationals and which do not have a digital tax agreement with the United States would have to revise their SEP rule in order to avoid getting involved in a trade war with the United States.

Conclusion

There is no doubt that the G7 proposal on global minimum tax is a laudable attempt to address tax avoidance and profit shifting by MNCs. However, there are major obstacles that may impede the implementation of the agreement. First, the G20 nations that include different group of economies (including China, Russia, India and Brazil) would have to give support to the proposed minimum tax rate in their next meeting scheduled to hold in July. There is no certainty as to whether the proposal would receive the blessing of the 19 member countries and the EU, particularly in light of the fact that some of the G20 nations maintain a low corporate tax rate in a bid to attract investments by multinationals. Ireland, which, keeps a low corporate tax rate of 12.5%, has protested against the global minimum tax and is therefore unlikely to accept a higher minimum tax rate which may reduce the influx of revenue in investments from multinationals. There is also the issue of whether the proposal would be passed by the United States Congress, especially considering the fact that the Republicans have shown resistance to the minimum corporate tax rate, as they are of the view that imposing the tax rate would make the United States less competitive in the global economy. It is, therefore, unlikely that the proposal would be passed in an evenly-divided Congress, where two-thirds majority is required.

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