The 15% global minimum tax on corporate profits is likely to generate only a fraction of the tax revenue expected, according to a new report.
The report, released by the EU Tax Observatory, found that since 2021, when more than 140 countries that are members of the Organization for Economic Cooperation and Development agreed to a global minimum tax of 15% on multinational profits, the rule has been dramatically weakened by a growing series of loopholes. The 15% GMT is also sometimes referred to as Pillar Two of the OECD’s action plan for combating base erosion and profit shifting by multinational companies.
“The global minimum tax, as things stand, would generate only a fraction of the tax revenue that could be expected from it based on the principles laid out in 2021: less than 5% of global corporate income tax revenue as opposed to 9% with a 15% rate and no loopholes and more than 16% with a 20% tax rate,” said the report. “Even more worrying, the global minimum tax still allows for a race-to-the-bottom with corporate taxes (and may reinforce it) because it allows firms to keep effective tax rates below 15% as long as they have sufficient real activity in low-tax countries. This exemption — a carve-out for economic substance — provides incentives for multinational companies to move production to very low-tax countries — and in turn incentives for tax havens to keep providing rates below 15%.”
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The report pointed out that new forms of aggressive tax competition have been emerging in recent years that can severely affect government revenues. Over the past 15 years, many countries have introduced preferential tax regimes to attract specific socio-economic groups perceived as especially mobile. In many cases, the special regimes mainly target wealthy individuals and reduce the progressivity of tax systems, fueling inequality.
For example, subsidies for producers of sustainable energy can more than offset the revenue gains from the global minimum corporate tax. As with the Inflation Reduction Act in the United States, governments are offering subsidies to producers of green energy. While that can accelerate the transition to a zero-carbon global economy, it raises some issues that are similar to those raised by traditional tax competition between countries by depleting government revenues and boosting the after-tax profits of shareholders, who tend to be near the top of the income distribution.
The report pointed out that global billionaires have relatively low personal effective tax rates, of between 0% and 0.5% of their wealth. In the U.S., the effective tax rate of billionaires appears closer to 0.5%, while in France it’s closer to 0%.
The OECD launched the Base Erosion and Profit Shifting project in 2015, and in 2017, the U.S. introduced measures to reduce profit shifting by U.S. multinational companies. while cutting its corporate tax rate from 35% to 21%, the report noted. But seven years after the start of the BEPS process and five years after the U.S. law, global profit shifting appears to have changed only marginally, the report noted.
“The global loss of tax revenue due to this shifting appears to have stagnated at about 10% of corporate tax revenue collected,” said the report. “This is not to say that the policy initiatives of the last decade have had no effect: Absent these policies, profit shifting may have been even higher today.”
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