The OECD’s proposals to harmonise international tax regimes were generally welcomed by governments without considering potential benefits of tax competitiveness. Blinded by their wish to stop multinational corporations from moving their business to jurisdictions with more favourable tax regimes, few considered the practical implications of OECD’s plans. Currently, OECD countries have divergent tax regimes – the 2021 edition of the International Tax Competition Index produced by the Tax Foundation ranked countries regarding tax competitiveness. Estonia earned the top spot in the ranking because of its relatively low corporate tax rate, while Italy and France fared poorly due to features like punitive wealth and financial transaction taxes. We hence question, why countries with favorable tax systems should be held back by a harmonized but uncompetitive tax regime?
OECD Proposal Problems
Current OECD proposals on tax harmonization focus on ending the perceived tax ‘unfairness’ while providing little practical benefits. The first Pillar aims to set tax brackets universally on companies making global sales above €20 Billion and profit margins of more than 10%. However, in practice, large companies often place the taxpaying burden on other stakeholders – employees or investors. Therefore, instead of benefitting the most vulnerable, the proposal could be detrimental to workers as companies choose to cut wages instead of letting their revenues shrink. If insufficiently considered, such an outcome could further disadvantage low qualification workers, which are already significantly affected by the Covid-19 pandemic.
As a second Pillar, the OECD proposes to make the multinationals’ move to low-tax jurisdictions more difficult – a measure of little practical significance. This would add base taxes for companies with revenues exceeding €750 million and is expected to raise around $150 billion additional tax worldwide. While it may address accountability for profit-making companies, it could also disincentivise investments and cause trade imbalance. Companies operating at profits especially during the post-pandemic era will not only find it harder to grow but also the countries they invest in would tend to be in selected locations (based more on resources than market competitiveness).
The second aim is also considerably flawed due to a global minimum rate 15% tax on multinational tech companies with large profits. Firstly, all but three states in OECD already have a 15% or higher minimum tax rate. Forcing Hungary, Chile and Ireland to increase the percentage can be both difficult and unnecessarily problematic. Moreover, the OECD’s approach signals a strong lack of economic relativity – applying a universal policy reduces competitiveness in countries aiming to bring in investments. Smaller and growing economies will inherently ease taxes due to a lack of fiscal and physical resources. Additionally, OECD’s approach creates tax exemptions for certain sectors such as shipping and financial services, establishing a potential trade imbalance and biased competition environments.
More importantly, OECD’s overall fear of unfairness in the current tax system is not very convincing. It is a general assumption that companies do not pay sufficient tax in certain jurisdictions. However, such a perspective fails to take into account that companies without a physical presence in a country often owe it less tax. They use national infrastructure less, employ fewer workers, and have a weaker local impact – merely selling their products or providing services in that state cannot justify increased taxes. Overall, both Pillars of the proposal seek to stop countries’ attempts to create a business-favourable environment, relying on the largely unsubstantiated notions of unfairness.
What are the benefits of competitive tax regimes?
OECD’s claim that harmonised tax will help developing states to attract investment appears unsubstantiated. Setting rates for other countries is clearly dangerous due to economic relativity and market volatility between different nations. This is especially relevant as the pandemic has fuelled large government spending – tax competition would help with economic recovery in the foreseeable future. These proposals would decrease comparative advantage. This would cause a deceleration in the market and further inequalities as a result of companies and nations burdening citizens and employees.
Liberal economies should employ tax as another avenue for economic competition, which only encourages business innovation and growth. The attempts to establish a level playing field might be more harmful to growing economies. For example, Estonia’s leadership in the index only demonstrates the positive effects of tax competition. In a highly centralised European Union, Estonia’s advantageous tax regime is a key strength when attracting investment. We strongly argue that if such governments manage to establish a balanced system of favourable commercial environments and fair taxpayer duties, they should not be forced to make their rules less advantageous.
The OECD has failed to consider the domino effects that tax harmonization has on further economic disparity. The proposal is also riddled with its own share of loopholes as well as disruptions to countries’ competitive advantage. Governments need to consider that their trade friendliness will be threatened by a global tax rate, while little practical benefits will be derived from OECD’s changes.
