In the words of Pope Francis in Fratelli Tutti, the COVID-19 pandemic is “the storm” that has exposed our vulnerability as humanity and has momentarily revived the sense that we are a global community, all in the same boat, where one person’s problems are the problems of all.
Once more we realised that no one is saved alone; we can only be saved together. One is therefore tempted to think that when the G20 countries endorsed on Saturday, July 10th 2021, their “historic” agreement on a global minimum corporate tax rate of 15 percent, initiated at the G7 June meeting, was guided by a similar understanding.
The G7 initiative had been seen to be “historic” by the initiators, because they stated a potential to contribute towards: paying “off debts incurred during the COVID-19 crisis” by countries, “better global tax justice” by minimising tax avoidance multinational corporations do in the countries where they do business, avoiding the practice of countries undercutting each other by setting lower corporate tax rates in a “the race to the bottom in corporate taxation”, and finding ways for the slippery tech giants like Amazon and Facebook to pay their fair share of taxes to governments. Certainly, the agreement on corporate taxation was long overdue, as Governments have long grappled with the challenge of fairly taxing global companies operating across many countries; a challenge that has grown with the boom in huge tech corporations.
Multinational corporations have been using the competition among countries to undercut one another through low or zero corporate taxation, to their advantage. The corporations identify these countries or territories with low corporate taxes to set up their branches or sister corporations and declare profits in those countries. As such the companies only pay taxes at the local rate, even if they make their profits from another country. Though this is legal and commonly done, it raises a lot of moral and ethical questions, especially as some of these profits are generated from countries that desperately need more revenue, through the use of resources of the common good. According to the G7 agreement, which the G20 has recommended to the OECD, companies will then pay more tax in the countries where they are selling their products or services, rather than wherever they end up declaring their profits. Again, the global minimum tax rate will help avoid the practice of countries undercutting each other with low tax rates. Separately, the G7 also agreed to a commitment to make it mandatory for firms to report the climate impact of their investment decisions. The details of the agreement are contained in the G7 communiqué, which was later affirmed by the G20 communique. In sections of the corporate world, the G7 agreement has been seen as a way to create a multilateral solution that will help bring stability to the international tax system and certainty for businesses, while strengthening public confidence in the global tax system through a balanced and durable agreement.
On the day of its adoption, already 131 of 139 states cooperating in the OECD/G20 inclusive BEPS (Base Erosion and Profit Shifting) tax framework followed the G20 recommendation, and the number of countries that have endorsed the minimum corporation tax rate of 15 percent has since increased. Although this proposal also favours countries that would like to have a corporate tax rate that is higher, it goes against the interests of countries that would like to set corporate tax rates lower than the 15 percent minimum. Countries with lower corporate tax rate have seen it as unfair. Ireland, for example, with a 12.5 percent corporate tax rate has been emphasising the need for the new deal to “meet the needs of small and large countries, developed and developing”, using that to show its disappointment with the agreement. What remains to be seen is whether the implementation of the agreement and the corporate tax rates will also provide for the taxation rights of countries that would like to have lower corporate tax rates, since taxation rights belong to states and their governments as sovereign powers.
Yet three more problems arise. First: 139 cooperating states in the inclusive tax framework does not really mean that this is cooperation at eye level. In the end it amounts to the situation that the 38 OECD member states suggest something and “invite” other states to adopt and cooperate with those new rules. Second, when considering, that the world’s poorest countries are not even part of the 139 cooperating in the OECD/G20 framework, which amounts to around 60 more listed states. For them, the proposals being discussed seem to be even more complicated, inflexible and unfair. Thirdly, there is also the question of whether this will automatically improve revenue generation, and not simply set a new floor for another low rate corporate tax competition.What is in the Deal for Developing Countries, especially in Africa?
The opinion in the cycles of civil society organisations in Africa concurs with those elsewhere, who argue that this deal should be outrightly rejected. First, they argue that the G7 is not inclusive of the countries in the developing world, and is thus completely illegitimate and unrepresentative. Neither is the G20 or the OECD with its 38 members only. In line with that, they vehemently protest that the consent of few African countries like South Africa that have been co-opted into the G20 and OECD, should not be taken as representing those of the rest of the African countries in negotiating the global corporate tax rate. Others also see this as a ploy to make the poor countries sign away their rights to tax, which will continue the path of their impoverishment, contrary to the spirit of the Addis Ababa Action Agenda 2015 and the Sustainable Development Goal 17.1 to strengthen domestic revenue mobilisation capacity, especially of developing countries through international support. According to the Tax Justice Network, a 21 percent minimum tax rate could recover more than $640 billion in underpaid tax, and such a tax would hit the world’s 100 largest multinationals better than the proposed 15 percent rate in the agreement. Apart from the above, there are also implementation concerns that the devil is in the details of this agreement. For instance, the proposed ‘residual’ and ‘routine’ profits make it difficult to maximise revenue from the profits to be taxed, while also retaining a system which makes rich countries rule setters and poorer countries rule takers.
The rich countries are very powerful, but cannot be considered to be very altruistic all the time. Which is why there are good reasons to believe that it is those very rich countries which, in the end, will benefit most from the Corporate Minimum Tax Agreement. In the interest of the poorer countries, it is important to recall that the history of the establishment of the G7, which has led to the emergence of other rich country clubs like G20, hides more sinister realities. The foundation of the G7 was a counter attack on the demands of the newly independent countries for a more democratic global economy. With the UN inclinations towards such a more democratic global economy, the members of the then G6 moved strategic economic decisions to the closed rooms of a privileged political class, a trend that seems to be in practice in the world today. In this case, it may be said that a snake only sheds its skin to become a bigger snake. This conflict between the “rich countries clubs” like G7/OECD on the one side, and the more inclusive UN framework supported by the G77 and developing countries, is therefore ongoing and was also visible and divisive at the 2015 FinancingForDevelopment 3 meeting in Addis Ababa. Can the bigger self of the G7 then be realistically assumed to be magnanimous to the rest of the countries of the world as it remains a gathering of seven of the richest countries in the world? Or is the Global Corporate Minimum tax just a variation of this ongoing conflict between rich and poor countries?Is there Still Hope with this Initiative?
There is evidence to show that governments of the G7/G20/OECD countries are beginning to listen to popular opinion – indicating the growing importance of people power. On that background, the historic nature of the agreement for the developing countries can be seen in the fact that it provides an opportunity to push for a more just process since it has opened the old laws of international taxation for review. Developing countries are thirsty for revenue in general, and reliant on corporate tax in particular. Countries in Africa also rely on corporate taxation to raise a good portion of their revenue. That is partly because large informal sectors mean that they raise less from alternatives like personal-income tax. The global minimum corporate tax rate being discussed could be helpful for many of Africa’s countries which still tend to under-tax capital, leading to capital outflows.
But, of course, there are also African “home-made” problems: Apart from the known tax havens in Africa like Mauritius and Seychelles, which offer a zero percent lowest available corporate income tax, a number of other African countries also operate on policies of granting tax exclusions, exemptions, fictional interest deduction, loss utilisation, tax holidays and economic zones under pressure for the multinational corporations (MNCs) – creating more avenues for revenue haemorrhage. The G7 initiative on corporate tax rate that is gaining traction could therefore help the African countries to take the opportunity to press for review of the system for the better through strengthening the fledgling Africa Continental Free Trade Area.
However, the finance ministers of many of these developing African countries are still silent, as usual, while others have already accepted the agreement. As the agreement moves to the next step of being concluded at the levels of the other OECD forums, it will pass without the contribution of these African countries, yet it will impact on them. At the time of the discussion, only South Africa was invited to participate, which does not imply that all Africa was represented by this symbolic participation. The rest of the African countries need to take deliberate steps to consider the proposal for its merits and demerits so as to propose amendments that take care of their interests. They need to strongly bargain with one voice, given such an opportunity when such a global system is being reviewed.How Can the Church Help?
Overall, an initiative like the G7 agreement can only become more beneficial to all the countries of the world when it is accomplished through more concerted effort and through consensus. Apart from the involvement of the countries, some of which are not actively participating, the Church should seek to be involved in advocating for the benefits to be more universal, especially standing for the interests of the poor. Pope Francis has been calling for a new way to address the problems in the world arising from inequalities, now further exacerbated by the COVID-19 pandemic. According to the Pope, it is important to create a community of belonging and solidarity, avoiding the illusions such as consumerism that have been misleading and resulting into anguish and emptiness, with consequences rapidly degenerating to become worse than any pandemic.
As the world continues to be faced by different crises, the actual strategies that have been developed worldwide to address these crisis have continued to foster greater individualism, less integration and increased freedom for the truly powerful, who always find a way to escape unscathed. The outcome is seen in the increasing inequalities at both personal levels and among the different countries of the world. For solidarity to work the practical steps like establishing economic institutions and systems of international finance based on the mutual respect and benefit should be considered. These should fully recognise the basic freedoms of all the countries, especially the weaker ones, amidst ideological differences. The Pope further stresses that “the international community is a juridical community founded on the sovereignty of each member state, without bonds of subordination that deny or limit its independence”. Furthermore, the Popes, not the least Pope Francis, advocate that the founding principles of the existing, more inclusive institutions like the United Nations; - the development and promotion of the rule of law and the realisation of justice for universal fraternity - should be recognised through negotiation, mediation and arbitration, instead of promoting actions that delegitimise it. The local and universal Church must become more involved in seeking to promote this principle of solidarity the Catholic Social Teaching proposes, and which Pope Francis has emphasised in Fratelli Tutti.
Especially for the civil society representatives, their stand should stress that a global tax agreement of the kind being discussed should be constituted under the auspices of the United Nations, to be coordinated by the UNs Tax Expert Committee, which has the right mandate. The current challenge is that there are rich countries working hard to maintain the status quo of setting the rules that others follow. On the other hand, there are the developing countries, which seem to have resigned to fate – and continue to take such rules, however unfair they may be. A third voice of reason is required, particularly when the world is struggling to come out of the health and economic crisis meted by the COVID-19 pandemic. The Church should endeavour to join other well-meaning stakeholders to be part that voice of reason.
Andebo Pax Pascal, is the Research and Advocacy Officer, Jesuit Justice and Ecology Network Africa.
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