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Global Tax: business opportunities and challenges

  • Meeting in digital format
  • 8 February 2022
        The concept of a global, transnational tax is nothing new. The idea was first broached around a hundred years ago in the League of Nations during the First World War. Although not yet global in scope, talks were already underway regarding the territorial authority to tax oil companies operating in countries different to where they were incorporated. Those sessions gave birth to the “stable organization” concept still in use within the framework of international taxation. In today’s much broader-based discussions, oil is not the only global asset considered – and private multinational enterprises have grown big enough to compete with governments.
        An agreement was reached this past October on the implementation of harmonized international tax rules – a historic first in which the United States, the European Union and China have found a point of convergence despite their differing points of departure. The accord is aimed at a revision of the cardinal principles of international taxation, and it rests on two pillars: the payment of taxes in the countries where profits are generated and a global minimum tax.
        The first pillar establishes that profits must be taxed in the country where they are generated, regardless of whether the company is physically located in that country. The crux of the problem is being able to target the profits of multinational enterprises since it is estimated that the multinationals subject to this agreement generate approximately 90% of total profits. Nevertheless, the technicalities of calculating the profits generated in each country have not yet been specified. The second pillar provides for a minimum 15% tax across the board. This new rate is effective, not nominal and establishes a parity of conditions for multinationals operating in multiple jurisdictions.
        The agreement as it stands is the fruit of a compromise on a range of negotiated demands, which inevitably makes it imperfect; yet, the result is a balanced one that is an important milestone on the way to establishing global rules suited to the modern economy. Nevertheless, there are still many challenges to rendering its effects concrete; for example, how the global minimum tax base is to be calculated and whether it will differ from one country to another. It is important that the law provide the means for and simplify the application of the new tax for businesses without duplicating non-productive costs.
        Business prospects are certain to change significantly, since implementation of the global tax agreement will reduce the competitive tax incentives that countries use to attract business and, consequently, capital, but that also create market distortions. Thus, the combination of taxation and target market will significantly influence where companies choose to locate – choices that ultimately steer investment flows and jobs. Sterilizing the impact of taxation on such decisions could significantly reduce distortions, much to the benefit of medium-sized enterprises. It is also important to point out that the second pillar will not affect web giants only, but all multinational enterprises operating in sectors considered more traditional. Thus, the accord affects not only the virtual economy but the real economy as well.
        The global tax’s ultimate aim lies within the broader context of regulating internet business activity. Considerations range from the much-discussed issues of data treatment to the web tax, which, now more than ever, is a necessary redistribution mechanism indispensable for confronting the economic and social crisis triggered by a Covid-19 pandemic that has been draining the public coffers. Finally, it must not be forgotten that the global minimum tax has even deeper political resonance; indeed, it conveys the democratic idea that multinationals must be required to make a greater contribution. The introduction of a minimum tax addresses the issues of justice and fairness in response to such colossal accumulations of wealth.
        The global minimum tax is an initial step, certainly not the complete answer, but important and necessary – most of all because it is the first truly global accord ever and possibly the start of a process to be replicated in other economic and social spheres.