Dear Mr. President,
The world has welcomed your election and commitment to restore diplomatic engagement with the international community to the center of US foreign policy. By rallying governments to create the conditions for an equitable and environmentally sustainable global economic recovery, your leadership can encourage transformative changes.
For too long, international institutions have failed to deal with one of the most toxic aspects of globalization: tax avoidance and evasion by multinational corporations. Fair taxation of multinationals is needed to create the type of societies that we aspire to, and it must be a central part of any progressive tax system aimed at driving economic growth and creating high living standards for all. Ending corporate tax avoidance is also one of the best ways to tackle rampant inequality of wealth and income.
By shifting their profits to tax havens, large companies deprive governments worldwide of at least $240 billion per year in fiscal revenues. This shortfall affects not only the United States, where some 50% of overseas profits made by US multinationals are transferred to tax havens each year, but also the Global South, where revenue sources are more limited and hence reliance on corporate tax receipts to fund public services is greater.
As members of the Independent Commission for the Reform of International Corporate Taxation (ICRICT), we urge you to fulfill your promise to “lead efforts internationally to bring transparency to the global financial system, go after illicit tax havens, seize stolen assets, and make it more difficult for leaders who steal from their people to hide behind anonymous front companies.” To do that, your administration should engage actively in ongoing efforts to overhaul the international tax system to ensure fair taxation of multinationals, which is currently being discussed within the G20-mandated OECD process.
Unfortunately, these negotiations have not gone well. The governments of leading member states (including the previous US administration) have negotiated under the misplaced assumption that their national interest is best served by protecting those multinationals headquartered within their borders. Discussions on the reform of international taxation have thus sacrificed common ambition to the lowest common denominator.
Meanwhile, multinationals continue to avoid taxes that could help pay for public expenditure to support the post-pandemic recovery. The world cannot afford this.
The negotiating process has, nonetheless, reached agreement that multinationals should be considered unitary businesses. This means that their worldwide profits should be taxed in line with their real activities in each country. This is a familiar concept in the US, where corporate profits are allocated to different states on a formulaic basis, according to the key factors that generate profit: employment, sales, and assets. But the current proposal applies this allocation criterion to only a small share of a firm’s global profits – particularly those of highly digitalized multinationals, which are mainly US-based.
E-commerce grew by nearly a third during the pandemic, and it is critical that not only digital multinationals, but all multinationals’ digital business operations pay their fair share of taxes. An ambitious and comprehensive reform therefore should be adopted to replicate the US system at the international level, without distinction between digital and non-digital businesses. Such a rule would help to establish a more level playing field, reduce distortions, limit opportunities for tax avoidance, and provide certainty to multinationals and investors.
This system should be supported by a global minimum tax on multinationals, putting an end to harmful tax competition between countries and reducing the incentive for multinationals to shift profits to tax havens. But the 12.5% minimum rate being discussed at the OECD and elsewhere could become the global ceiling, in which case the laudable initiative to oblige multinationals to bear their fair share of taxes would end up doing the opposite.
Your campaign promised to raise the US minimum tax on US corporations’ foreign earnings (known as “GILTI”) to 21%. This measure would not only have the merit of increasing your country’s fiscal resources; it would also provide the political support for other countries’ policymakers to follow suit.
An ambitious global minimum tax could be a game changer in the fight against tax avoidance. If G20 countries were to agree to impose a 25% minimum corporate tax (as the ICRICT advocates) on the global income of their multinational firms, more than 90% of worldwide profits would automatically be taxed at 25% or more. Of course, it is also essential that such a tax should be designed to allocate taxing rights fairly between firms’ home and host countries.
Treasury Secretary Janet Yellen said at her confirmation hearing that your administration looked forward “to actively working with other countries” in order to “try to stop what has been a destructive, global race to the bottom on corporate taxation.” There is no evidence that the recent trend toward lower corporate tax rates has stimulated productive investment and growth. The 2017 US rate cut mainly ended up funding dividend payments and stock buybacks.
Corporate taxation is in effect a tax on pure profits, and so lowering the rate has little effect on economic activity. In other words, corporate taxes are essentially a withholding tax on dividends, and thus an income tax on the wealthy, because equity holdings (directly, or indirectly through, say, pension funds) are even more unequally distributed than income.
We ask you to ensure that the US once again leads by the power of example and cooperates with other countries willing to deliver a comprehensive reform that is equitable for the US and the rest of the world. Until such equitable reform is adopted, trade sanctions against countries that have already decided to tax digital businesses – many of them developing countries desperate for additional revenues – will be counterproductive.
Re-engaging with the multilateral system while accepting a weak international compromise on taxation of multinationals will further erode, not restore, trust in the system. It is fully within our power to build a post-pandemic world that is more sustainable, cooperative, and fair, where multinationals pay the taxes they should. The ICRICT would be honored to support your administration in achieving this crucial goal.
José Antonio Ocampo, a former finance minister of Colombia and United Nations under-secretary-general for Economic and Social Affairs, is a professor at Columbia University and Chair of the Independent Commission for the Reform of International Corporate Taxation
This commentary is also signed by Edmund Valpy Fitzgerald, Kim Jacinto-Henares, Eva Joly, Ricardo Martner, Suzanne Matale, Léonce Ndikumana, Irene Ovonji-Odida, Thomas Piketty, Magdalena Sepúlveda Carmona, Wayne Swan, and Gabriel Zucman.