Overcome conflicting interests in establishing international taxation rules

Major progress has been made to create a new framework that will allow each country to impose a corporate tax fairly on multinational companies. Establishing an international taxation system in line with the changing times can be called a momentous endeavor.

The finance ministers and central bank governors of the Group of 20 major economies have held a meeting and reached a basic agreement on new rules for international taxation.

The pillars of the new rules are a minimum global corporate tax rate of at least 15% and the introduction of digital taxation with the U.S. giant information technology companies dubbed GAFA in mind.

After reaching a final agreement in October, they intend to aim to implement the measures in 2023.

Negotiations did not go smoothly due to opposition from the United States, the base of many major IT companies. However, it is significant that progress has been made with the inauguration of the administration of U.S. President Joe Biden, and that common ground has been found.

For nearly 40 years, countries have been competing to lower corporate tax rates in order to attract more companies and boost their industrial competitiveness. As a result, while multinational corporations and IT companies have seen their revenues increase, tax revenues in each country have been stagnant.

GAFA and other multinational companies are said to be trying to evade taxation by transferring their profits to tax havens — countries and regions with low tax rates. A minimum corporate tax rate can be expected to prevent this from happening.

Since last year, countries around the world have implemented massive fiscal stimulus policies as part of measures against the novel coronavirus pandemic. Setting a minimum corporate tax rate is apparently aimed also at preventing further deterioration of their fiscal condition.

Digital taxation is a response to changes in the structure of industries.

Under the current taxation system, a country cannot collect corporate taxes from companies unless they have a base such as factories and offices in the country. Since the system is mainly designed to deal with the manufacturing industry, many countries have not been able to sufficiently tax U.S. tech giants that make huge profits from cross-border internet businesses.

The new taxation system will allow countries to impose a certain extent of taxation on companies that earn a certain level of sales and profits even though these companies have no business bases in those countries. About 100 companies, including GAFA, will likely be subject to the new taxation system.

However, there is a high possibility that the interests of each country will conflict over the specific details in implementing the new taxation system.

About 130 major countries and regions have already agreed in principle on the new rules for international taxation, but countries such as Hungary and Ireland, whose tax rates are 15% or lower, are not among them.

Among the countries that have agreed, opinions are said to differ between nations that want the minimum tax rate to be at least 20% and those that want it to be kept at 15%. In addition, the details of the mechanism by which countries will obtain revenue from digital taxation has not been determined.

It is important for each country to deepen discussions toward a final agreement with a view to linking fair and appropriate rules to the development of the global economy as a whole, without just focusing on the interests of their own country.

— The original Japanese article appeared in The Yomiuri Shimbun on July 13, 2021.