Editorial: International tax reform can counter the downsides of globalization
International tax reform has taken a big step forward. Following the agreement reached by the Group of Seven (G-7) finance ministers in June, the Organization for Economic Co-operation and Development (OECD) recently announced that 130 of the 139 countries and jurisdictions involved in its Tax reform negotiations signed a joint statement that explicitly supports the introduction of a minimum global corporate tax rate of at least 15%, ensuring that large multinational corporations (MNEs) pay taxes where they operate and make a profit. Member states that have signed include China, India and other emerging economies. The 130 countries and jurisdictions represent over 90% of global GDP. The OECD also said the remaining technical work and plan for the tax reform framework is expected to be finalized in October and effectively implemented in 2023.
The most radical international tax reform in a century is approaching its final phase. International negotiations on tax reform have been going on for more than a decade and are at an impasse. In recent years, with the gradual change in attitude of various countries, especially the United States, the negotiations have started on a benign path. International tax reform is not only about taxes but also about the rules of global governance; it is essentially the reflection and the requirement of economic integration. While globalization cannot be stopped, it has come with long-standing discontent. Since the global financial crisis, unilateralism, protectionism and populism have been rampant, leading to the partial decline of globalization. In this context, the broad support for international tax reform reinforces globalization and marks its self-correction. The constant progression of economic globalization and multilateralism is inseparable from the adjustment of tax rules. In other words, international tax reform not only conforms to the demands of economic integration, but also serves as a guide for them.
International tax reform has a particular context. Since the 1980s, countries around the world have adopted tax reduction as a general policy choice, creating a “race to the bottom” in corporate tax rates. This global race is not unnecessary for the growth and prosperity of countries, and can also promote institutional competition between countries. However, countries inevitably find themselves trapped in a competition over who can reduce their tax rates the most. To make matters worse, multinationals, especially some internet giants, arbitrate between different tax systems in different countries to evade taxes, shifting profits through so-called “tax havens”. While this is a rational choice for companies seeking to serve their own interests, it hurts the international community. According to estimates by the OECD and a United Nations group of experts, the total loss of tax revenue caused by tax evasion by global multinationals amounts to hundreds of billions of dollars each year. This “race to the bottom” violates any notion of tax fairness, widens the gap between rich and poor and increases dissatisfaction with globalization among its losers.
As such, abolishing irrational fiscal policies around the world has become a common desire of countries despite their various reasons for supporting it. This shared will is the basis of a breakthrough in global tax negotiations.
The international tax reform plan has “two pillars”. The first will ensure that multinationals – especially tech giants like Google, Apple and Facebook – pay their fair share in the markets where they do business and make a profit. It will also ensure a more equitable distribution of the profits of multinationals to the governments of the countries where they make those profits, whether or not they have a physical presence there. The second pillar aims to regulate finance and tax competition between countries by introducing a global minimum tax on companies. The OECD estimates that a global minimum corporate income tax with a rate of at least 15% will generate around $ 150 billion in additional tax revenue for countries each year. The envisaged reform also targets “tax havens” in an attempt to put an end to this “race to the bottom”.
We need to understand the truth about international tax reform. It is above all about rectifying a gap and making efforts to restore tax justice around the world. Although tax reform will increase the tax burden on multinationals, particular emphasis is placed on structural adjustment of the tax burden rather than simply increasing taxes. At a time when populist sentiment is on the rise, the international community should avoid the idea that “it is better to impose higher taxes on multinationals”, as excessively high tax rates will dampen economic growth, thereby reducing tax revenue and harming the well-being of all people. In any tax reform, it is always necessary to find a balance between efficiency and equality.
The Chinese government’s adherence to the declaration of international tax reform is clearly based on sound strategic judgment. In today’s international environment, this is of particular significance, showing that China, the biggest beneficiary of globalization, is committed to “championing cooperation rather than confrontation, opening doors rather than closing them, and focusing on mutual benefits instead of zero-sum games. “It is widely believed that introducing a global minimum corporate tax rate will not have much of an impact on China. Some are concerned about the actual tax burdens on high-tech companies, but exceptions can be sought through negotiation.Generally speaking, China’s active participation in negotiation and consultation makes it possible to adapt upstream to the new trend in international tax reform and to transform passivity into initiative.
Adopting international tax reform is also a rare opportunity for China to push forward its own tax reform plans. In the past, the search for competitive tax cuts around the world has followed the same logic across China: Local governments have rushed to introduce explicit or covert tax breaks and preferential policies. This fierce competition, which relied simply on low tax rates or preferential policies to promote investment, ostensibly attracted or withheld investment while undermining tax justice in a way that was unfavorable to the development of all regions in the long term. Rather than tax policy, things like a region’s business environment, industry chain, and infrastructure actually attract investment. China should take advantage of international tax reform to strengthen its capacity for national governance, improve the tax system and improve local tax policies. To this end, promoting fairness in the national tax system should be the priority.
No matter what kind of political and economic ideas people have, they cannot ignore the problem of global income disparity. Multinationals that practice tax evasion have long been the target of public criticism. If left unchecked, this phenomenon will definitely undermine globalization. International tax reform should lead to improved globalization. However, it should also be noted that consensus on the international tax reform plan is only the first step towards reforming the global tax system, and a lot of technical work remains to be done. Even if the plan is implemented as planned in 2023, policy coordination and information sharing between countries will still be subject to an international political and economic situation in which disputes and friction will emerge. This breakthrough deserves to be celebrated, but there is still a long way to go.
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