Is more compromise required for global tax deal?

The world is awash with state debts and with governments wanting to spend more. As countries unite to try and agree a global tax deal, it looks likely “green” taxes will rise.

| 4 min read

When President Donald Trump took office Wall Street rose strongly, enthused by his proposed business tax cuts and by his promotion of faster growth. When President Joe Biden took office Wall Street rose strongly, buoyed by the gradual emergence of the economy from lockdown and by his policies to speed growth from stimulus – despite his wish to raise corporate taxes. The new President both proposes a substantial hike in US company taxes to 28% from 21% and is seeking a new world minimum rate.

The problem with seeking a world solution to what President Biden sees as companies paying too little tax is it that takes time and is open to plenty of disagreement and watering down. G7 agreement was secured by lowering the proposed minimum rate from 25% to 15% to get the principle established.

The G20 has not specified a rate, and the Organisation for Economic Co-operation and Development (OECD) now thinks it might secure 130 countries to back the 15% rate, allied to the other proposal of making large technology companies book their profits where they have the turnover. Attention will shift to the G20 meeting on 9 and 10 July in Venice, when it will review where the world has reached in these difficult negotiations.

Countries split

In Europe, the tax haven countries of Ireland, Luxembourg, Hungary and the Netherlands are not happy about the scheme. The emerging world has not fully signed up either. The winners from the reallocation of profits by tech companies will include the US itself, as the country has lost money to tax havens in recent years. Meanwhile, the European Union (EU) will lose any idea of a new digital services tax, which some individual European countries have already introduced as part of the price of this package.

The EU is keen to find new sources of revenue that it can claim as its own to add to its so-called own resources. The present front runner is a carbon border tax. The idea would be to charge a carbon tax on imports related to the costs EU companies have to pay under the EU’s emissions trading scheme to make the same product at home.

The EU is worried that such a tax would be deemed illegal under World Trade Organisation rules. The leaked draft suggests starting with a tax on imported cement, electricity, iron and steel, aluminium and fertilisers, but it might go on to cover other fossil-fuel hungry products in due course. It wishes to define the amount of the tax either by the amount of carbon produced by the exporter, priced at the EU’s own carbon price – or base it on the domestic production costs in terms of emission payments for the most carbon-intensive EU producers.

India, China, South Africa and Brazil are not happy about such a development and are suggesting that they and emerging market countries be exempted. Other advanced countries are considering such a tax as a good way of excluding otherwise cheap imports and boosting domestic production in areas that have often been in decline but have strategic importance.

Growing debts need servicing

The world is awash with state debts and with governments wanting to spend more. They are eyeing each other carefully, aware that taxing companies excessively in one country can just divert investment and business elsewhere. They also see that it has less political cost to tax companies, making the extra tax on people less direct than putting up VAT or Income Tax.

Governments will continue to circle the idea of higher corporate taxes, where collective endeavour would help them. They are more likely to succeed in getting more revenue out of green taxes, claiming a moral purpose for taking more of people’s money to spend on their own favourite causes. Either way, it will be a drag on investment returns when these taxes arrive.

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Is more compromise required for global tax deal?

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