A Global Taxation Agreement: About Time

Finally, after many years delay, an agreement for a common 15% corporate tax rate for international companies originally announced at the G7 summit in London in June has been ratified by 136 countries and jurisdictions representing more than 90% of the world economy.

Over the years, we have seen how a system based on borders and on the sovereignty of countries to decide their tax policies has been abused by a large number of companies that, by operating in different countries, have been able to avoid paying their fair share of tax, playing a game of cross-invoicing and transfer pricing between their different subsidiaries that allowed them, in the end, to end up paying utterly ridiculous tax rates, in a waste of aggressive tax optimization engineering that has seen many of the countries where they carried out their activities to be deprived of fair income.

Now, this abuse of the system may have come to an end, or at least its days are numbered: from 2023, all multinational companies whose worldwide sales exceed €20 billion and whose profitability exceeds 10% will have to pay tax of at least 15% of their turnover in the countries in which they carry out their activities, which will entail a reallocation to market jurisdictions of 25% of profits exceeding a 10% threshold. This amounts to around $125 billion globally. This minimum tax rate will apply to companies with turnover in excess of €750 million, which will generate an estimated additional tax revenue worldwide of around $150 billion. The next phase will now have to be completed: the approval and transposition into local laws by all the countries that have signed the agreement, with a view to implementing it from 2023 onwards. This step, logically, will encounter problems due to lobbying: countries such as Ireland, the last to sign the agreement for the moment, to raise its tax rate from 12.5% to 15%, or for the United States to accept an agreement that will mean that many of its companies will be subject to a much higher tax burden on their activities outside the country.

The agreement is a sign of the times: in a globally hyper-connected world, many of the rules that regulate it have to evolve to become global, if they are not to become obsolete and the target of all kinds of abuses, as has been the case with tax legislation for too many years. Years that have served to build economic empires giving some companies a de facto monopoly thanks to tax legislation that have given them much higher margins. But of course, it was not illegal…

Now, environmental agreements to be internationalized. As long as we continue to depend on local legislation, on the whims of governments and the companies of the day, we will continue to see how an energy crisis caused by speculation in gas prices causes the return of coal-fired power plants in several countries, including Spain: exactly the opposite of what we should be doing. Restarting a coal-fired power plant today, with the climate emergency spiraling out of control, should be punishable by lengthy jail terms. But no, nothing happens, because their country’s legislation allows them to bypass the Paris Agreement and emissions targets. We know full well where allowing countries to do as they see fit and violate emissions agreements, will lead us, or rather, where it won’t lead us.

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This post was previously published on MEDIUM.COM.

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