G7's global corporate tax hysteria
Hannan Hussain
Banners at an entrance to Lancaster House, the venue for the G7 Foreign and Development Ministers' Meeting in London, UK, May 4, 2021. /Getty

Banners at an entrance to Lancaster House, the venue for the G7 Foreign and Development Ministers' Meeting in London, UK, May 4, 2021. /Getty

Editor's note: Hannan Hussain is a foreign affairs commentator and author. He is a Fulbright recipient at the University of Maryland, the U.S., and a former assistant researcher at Islamabad Policy Research Institute. The article reflects the author's opinions and not necessarily the views of CGTN.

The Group of Seven (G7) Finance Ministers are expected to convene virtually on May 28 and coordinate an initial breakthrough consensus on international taxation rules for the world's largest companies. Friday's meeting, a firm basis for an in-person follow-up next week, is driven by a 15 percent global minimum corporate tax proposal floated by the United States, influenced by the G7, and destined for the Organization for Economic Co-operation and Development (OECD).

But the brand of influence exercised by the G7 in advancing this long-sought deal reveals deep contradictions. These include the nature of compliance actually demanded from multinationals, assumptions on universal profit cuts, vast inequities for emerging economies, and the group's tendency to embed the tax regime in national priorities.

The proposed global minimum corporate tax, for instance, puts overwhelming emphasis on taxing multinationals' overseas profits at about 15 percent, but doesn't reveal a mechanism to reconcile this practice with each country's existing tech-specific taxation. Ireland is a case in point. The European Union construed Dublin's famously low levies on foreign corporations as a reason to suggest profits were being taken away from other nations. The bloc ultimately factored this concern to marshal its support behind a unified tax regime. But the G7's corporate tax advocacy doesn't come with significant levers to rein in those particular profits: big companies will be taxed based on the revenues they generate in a particular country, rather than their corporate tax compliance being tightened based on geographic centrality as a whole.

Lessons from the U.S. 2017 tax cut reforms have shown Western economies that multinationals can continue to sidestep tax liabilities, even when the government greenlights a 40 percent downward change in total taxes due. So for smaller Western economies that employ relaxed taxation regimes to court their foreign direct investment, the G7's globally envisioned tax standard doesn't plug half as many gaps on corporate tax avoidance as it claims to.

By virtue of its exclusive club status, the G7 is also bounded by its limited authority over how corporate taxing rights can be enforced globally. For instance, it advocates greater corporate taxing rights for nations where multinationals reap their profits. But the same G7 is silent on how these very rights stand challenged when measures such as new tax deductions are introduced by other governments, effectively eroding the corporate taxable base it expects to expand.

Participants at the G7 Foreign Ministers' Meeting pose for a photo at Lancaster House in London, May 5, 2021. /Getty

Participants at the G7 Foreign Ministers' Meeting pose for a photo at Lancaster House in London, May 5, 2021. /Getty

Taxing rights are not G7's call either. Such legal imperatives are left for the 139 countries of the OECD. More tellingly, the body will have the final say in determining what corporate activities qualify as suitable exemptions to the world's first ever global corporate tax. The G7, bound by the OECD on the global tax plan, is just not interested in advancing the latter's priorities.

This shows in the group's reluctance to factor OECD's distinction between a large corporation's tangible and intangible profit streams, creating new constraints for OECD finance ministers who hope to negotiate with dozens of international economies in due course, and are keen to attach an assortment of corporate tax exemptions to court the latter's endorsements. "At the global level, I think it's not realistic to think that we could move ahead without some form of carve-out, which would recognize the activities, the substance," cautioned the OECD's top tax negotiator Pascal Saint-Amans as early as May 5.

In light of these underlying variations between the G7 and the OECD on global corporate minimum tax flexibility, the former could end up disrupting the level-playing field for emerging economies vis-à-vis their equitable multinational tax gains. First, the average legally authorized corporate tax rate – across the world – has taken a nosedive in recent decades, but the G7 economies have been saved a big hit on their taxed corporate profits. Why?

Part of the group's insurance stemmed from select members introducing unilateral big tech taxes in their own countries, and using the G7 platform to liberalize these policies as well as their taxable base for international clout. In stark contrast, emerging economies today just don't have the incentive to pursue such policies at home, as they have no clout at the G7 to render a privileged national policy consensus global.  

Second, the OECD blueprint for the G7's global corporate minimum tax support is known as the "Inclusive Framework" for Base Erosion and Profit Shifting (BEPS), a framework that is supposed to guide the entire trajectory of current G7 talks. But that OECD framework appears to be satisfied only in rhetoric as developed economies reserve the option to add tax credits themselves if the global corporate tax dream goes dark. This means blindsiding dozens of emerging economies that tap tax exemptions on a routine basis to secure contributions from big corporations.

Taken together, it also means that the G7 needs to forecast more than just corporate profits to render a privileged tax enterprise universal.

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