President Biden’s plan1 to end the race to the bottom with a global minimum corporate tax rate of 21% can recover more than $640 billion in underpaid tax from multinational corporations each year if implemented properly, new analysis shows. But a watered-down implementation being discussed at the OECD2, the world’s leading rule-maker on international tax, would shrink this sum and see some 75 per cent of recovered taxes captured by OECD member states – a small club of rich countries revealed last month to be responsible themselves for enabling two-thirds of global corporate tax abuse.3
A group of leading tax experts have proposed a simplified and balanced implementation of the Biden tax plan that can more fairly distribute recovered tax among countries while recovering an extra $103 billion, compared to the OECD proposal, under the same minimum rate of 21%. The Tax Justice Network is urging policymakers to make sure that the breakthrough to end the race to the bottom sees its victims compensated, instead of its worst perpetrators rewarded.
In response to analysis of the OECD proposal Liz Nelson, director of tax justice and human rights at the Tax Justice Network, said:
“Colonial powers like the UK and Netherlands have been instrumental in the development of an abusive global tax system which today robs lower income countries – where half the world’s population lives – of tax equivalent to over half of their combined public health budgets. We should not forget that it was slave owners who were compensated by empire when slavery was abolished, instead of slaves themselves. We must not repeat history when abolishing the race to the bottom, we must not reward the worst perpetrators of global tax abuse.”
OECD plan would shrink recovered tax by 16%
New research4 by a group of Tax Justice Network researchers working with other leading tax experts from the UK, Czechia and US reveals how much each country in the world can expect to recover in underpaid tax from multinational corporations every year if President Biden’s 21% global minimum corporate tax rate was implemented under the OECD proposal, or under the group’s simplified proposal presented in the research, referred to as METR (minimum effective tax rate).
With the global minimum rate set at 21%, the top five countries that will recover the most underpaid corporate tax from multinational corporations are the:
- US ($166bn under OECD proposal; $148.9bn under METR proposal)
- China ($64.4bn OECD; $101.4bn METR)
- Japan ($59.7 billion OECD; $79.3bn METR)
- Germany ($39.4 billion OECD; $47.8bn METR)
- France ($25.8 billion OECD; $28.6bn METR)
Under the OECD proposal, the world would recover $540 billion in underpaid tax from multinational corporations each year at a global minimum rate of 21%, which is $103 billion (or 16 per cent) less than the $643 billion than can be recovered under the METR proposal – a loss that could otherwise be more than enough to vaccinate the world against Covid-19 five times over.5 Just five jurisdictions – Greenland, Liberia, Marshall Islands, the British Virgin Islands and South Sudan – are projected to not recover any corporate tax under the proposals.
Under the METR proposal presented by the group of tax experts, the world would recover $643 billion every year in underpaid corporate tax at the same global minimum rate of 21%. The list of 10 jurisdictions that would not recover any tax under METR consists some of the world’s most extreme corporate tax havens, including the three jurisdictions – the British Virgin Islands, Cayman and Bermuda – that top the Tax Justice Network’s Corporate Tax Haven Index 2021, a ranking of jurisdictions most complicit in helping multinational corporations underpay tax.
OECD plan rewards worst perpetrators of race to the bottom
By privileging OECD countries when it comes to determining which countries can recover underpaid corporate tax6, the OECD proposal allows OECD countries to recover a share of underpaid corporate tax from multinational corporations that is greater than the share they lose.
- Currently, 65 per cent of all corporate tax lost each year due to multinational corporations shifting profit into tax havens is lost from OECD countries, while the remaining 35 per cent is lost from the rest of the world.7
- Under the OECD proposal, 75 per cent of recovered taxes ($404.6 billion) would go to OECD member countries, and just 23 per cent ($126 billion) would go to non-OECD countries. Just under 2 per cent ($9.3 billion) would go to OECD dependencies to which OECD countries outsource some of their tax havenry, like the British Overseas Territory Cayman Islands and Netherland’s Aruba.
- Under the METR proposal, 69 per cent of recovered taxes ($444.8 billion) would go to OECD member countries, and just under 31 per cent ($198.1 billion) would go to non-OECD countries. Just 0.08 per cent ($0.5 billion) would go to OECD dependencies.
- OECD countries recover an extra $40 billion in tax under the METR proposal even though taxes are distributed more fairly, due to the extra $103 billion the METR proposal recovers in comparison to the OECD proposal.
OECD countries were revealed last month to be responsible for enabling more than two-thirds of the world’s corporate tax abuse risks when the Tax Justice Network published its Corporate Tax Haven Index 2021, a ranking of the countries most complicit in helping multinational corporations underpay tax. The OECD itself came under fire when the index revealed that countries responsible for 98 per cent of corporate tax abuse documented by the index were graded as “non harmful” by the OECD’s flagship safeguarding policy against harmful tax behaviour.8
The OECD proposal to apportion the biggest enablers of global corporate tax abuse with a share of recovered corporate tax disproportionally larger than the share they lose effectively rewards the worst perpetrators of the race of the bottom.
The METR proposal achieves a more proportional balance between OECD countries and non-OECD countries by simplifying the process for determining which countries can recover unpaid tax, to reflect where genuine business activity is conducted by multinational corporations. A country would have the right to recover a share of a multinational corporation’s underpaid tax that is proportional to the share of sales, employees and assets the multinational corporation has within this border.9
METR proposal recovers more tax for OECD countries AND for poorer countries
Of the extra $103 billion in tax recovered by the METR proposal in comparison to the OECD proposal:
- $40 billion would be collected by OECD countries, raising the total recovered by OECD countries to $444.8 billion
- $72 billion would be recovered by the rest of the world, raising the total recovered by non-OECD countries to $198.5 billion.
- $9 billion less in tax would go to OECD dependencies like the British Overseas Territory Cayman Islands where OECD countries outsource some of the tax havenry.
- Lower income countries in particular, where half the world’s population lives, would see the amount of underpaid tax they recover almost double from $16 billion under the OECD proposal to $31.3 billion under the METR proposal. The $31.3 billion would be equivalent to 36 per cent of the combined public health budgets of lower income countries.
In other words, rebalancing the global minimum corporate tax rate to reflect genuine business activity instead of arbitrarily privileging OECD countries would recover an extra $2.64 in lost tax for OECD countries for each extra $1 lower income countries recover while also doubling the total amount of tax lower income countries recover overall.
Increase tax rate by 4% to recover extra 5% of public health budgets
The research by the group of tax experts also models how much each country could recover in underpaid tax if the global minimum tax rate was set at different rates.
Implementing the METR proposal at 25% instead of 21% would:
- Recover an additional $140 billion in underpaid tax from multinational corporations, bringing the total amount of recovered tax to $783.8 billion.
- Approximately $97 billion of the additional recovered tax would go to OECD countries and the remaining $43 billion would go to non-OECD countries.
- By raising the global minimum tax rate by just 4 per cent, OECD countries would recover tax equivalent to 2.6 per cent of their combined public health budgets and non-OECD countries would recover tax equivalent to 5.1 per cent of their combined public health budgets.
In comparison, the OECD proposal would result in a total of $782.8 billion. Although only marginally lower than the total tax recovered by the simplified proposal, the OECD proposal would continue to reward OECD countries with a disproportionally larger share (74 per cent) of recovered taxes.
Critically, lower income countries would recover less tax under the OECD’s proposed global minimum tax rate set at 25% than they would under a simplified global minimum tax rate set at 21%. Emphasising the severity of the disproportional privileging of OECD countries under the OECD proposal, lower income countries would recover $24.7 billion if the OECD global minimum rate was applied at 25% but would recover $31.5 billion if the global minimum rate was applied at 21% and simplified and rebalanced to reflect multinational corporations’ genuine business activity.
Alex Cobham, chief executive of the Tax Justice Network and one of the authors behind the new research, said:
“The global tax system is our most powerful tool for tackling inequality, both within countries and between countries. But for decades, the race to the bottom on corporate tax, rubberstamped by the OECD, weaponised the global tax system to rob countries of hundreds of billions in tax, fuelling inequality to extreme levels while global and private wealth skyrocketed. President Biden’s historic demand to end the race to the bottom can finally reprogramme our global tax system to prioritise the needs of all people. But we must make sure the end of the race to the bottom sees its victims compensated, not its worst perpetrators rewarded.
“The OECD has repeatedly proven incapable of delivering meaningful tax reform because its own members are responsible for most of global tax abuse. Even with President Biden pushing for ambition, the OECD’s proposal would under-deliver, and deprive lower income countries of their share of the benefits. The simplified global minimum tax rate we’ve proposed today offers OECD countries the same tax gains, or more, but ensures lower income countries share those gains too.
“It would be unconscionable for OECD countries to deny the benefits to others – but sadly, that is exactly what has been proposed. It is vital that we move our global tax rules away from the OECD and into the inclusive setting of the United Nations. The urgent priority, as the UN FACTI Panel has recommended10, is to begin negotiations on a UN tax convention, open to all member states and reflecting all of our human rights.”
Sol Picciotto, lead research author, coordinator of the BEPS Monitoring Group and emeritus professor of law at Lancaster University, said:
“OECD countries have a choice: recover billions in lost tax for themselves only, or recover even more for themselves while making sure all countries benefit too. A simplified and balanced global minimum tax rate is that rare thing, a genuine ‘win-win’. It would be hard to understand, especially after the global pandemic has made gravely clear how dependent our collective wellbeing is on the wellbeing of the most disadvantaged among us, if the OECD chooses to help themselves only, and cut others out.”
Contact the press team: media[@]taxjustice[.]net
See table on how much tax each country can recover available here.
Download research paper here.
Notes to Editor
- For more info on the President Biden’s tax plan, see our recent blog titled “US Treasury Secretary Yellen confirms: It’s time to end the race to the bottom on corporate tax.”
- The Organisation for Economic Cooperation and Development (OECD) is an international membership organisation with 37 member countries. OECD members are high income countries and are generally regarded as “developed countries”. The OECD was founded in 1961 with the aim of promoting policies on tax, trade and welfare among its members and the rest of the world. Since its founding, the OECD has been the world’s leading publisher of rules, conventions and guides on international tax, including on how countries tax multinational corporations’ profits. Current OECD members are: Austria, Australia, Belgium, Canada, Chile, Colombia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.
- OECD countries and their dependencies were revealed in March 2021 to be responsible for 68 per cent of the world’s corporate tax abuse risks when the Tax Justice Network published its Corporate Tax Haven Index 2021, a global ranking of countries most complicit in helping multinational corporations underpay tax.
- The new research, a paper titled “A practical proposal to end corporate tax abuse: METR, a minimum effective tax rate for multinationals”, was published on the website of the Institute of Economic Studies at Charles University. A full table of how much tax each country would recover under the proposed tax plans is available here.
- The Global Fund estimated that $20 billion would be needed to vaccinate everybody in the world against Covid-19.
- When determining which countries may recover underpaid tax from multinational corporations, the OECD proposal gives first rights to the country where a multinational corporation is headquartered over other countries where the multinational corporation may also do business. Since multinational corporations are far more likely to be headquartered in OECD countries, the OECD virtually guarantees OECD countries first dibs on underpaid corporate tax.US President Biden’s plan to establish a global minimum tax rate set at 21% does not mean all countries would need to make sure their domestic corporate tax rate is set to at least 21%. Rather, under a global minimum tax rate, countries can continue to set their corporate tax rate as they choose. However, if a country applies a corporate tax rate of less than 21% to a multinational corporation booking profits in its jurisdiction, other countries can also tax those profits to bring up the tax rate effectively paid by the multinational corporation to 21%. The question then is, which countries have the right to tax (or top-up) the multinational corporation’s undertaxed profit? The OECD proposal answers this question by giving priority to the country where the multinational corporation is headquartered, which is far more likely to be an OECD country. The METR proposal, in contrast, allocates a country the right to tax a share of a multinational corporation’s undertaxed profit based on the share of the genuine business activity conducted by the multinational corporation within the country’s borders.
- See the Tax Justice Network’s State of Tax Justice 2020 for more information.
- See the Tax Justice Network’s Corporate Tax haven Index 2021 for more information.
- President Biden has also signalled an intention to move away from the OECD’s rules-based order towards a formulary apportionment similar to that used by METR. However, the US has so far only indicated that sales would be considered in the apportionment of taxing rights. Leaving labour out of formulary apportionment also result in privileging OECD countries, which have rich consumer economies, over lower income countries with producer economies.
- A report published by the UN High Level Panel on International Financial Accountability, Transparency and Integrity (FACTI) identifies tax abuse and other illicit financial flows as a systemic problem that “robs billions of a better future” and that can only be addressed by “nothing less than a transformation of the global financial system” led at the United Nations. The report provides a comprehensive set of recommendations that reflect in full the policy platform initiated by the Tax Justice Network in 2003, including a call for a UN tax convention to be established. The Tax Justice Networked praised the report as “a tide-turning moment in the fight against international tax abuse.”