As governments grapple with burgeoning deficits, the issue of augmenting tax revenues by addressing tax avoidance has assumed salience. The FT writes about the magnitude of the problem,
IMF economists estimated lost revenues from global tax avoidance to be as high as $650bn every year. In the UK, more than 50 per cent of the subsidiaries of foreign multinational companies currently report no taxable profits, according to a 2019 study by Oxford university research fellow Katarzyna Bilicka. In the US, 91 companies on the Fortune 500 index, including Amazon, Chevron and IBM, paid an effective federal tax rate of zero in 2018.
The OECD has been striving to negotiate a consensus on global tax avoidance strategies as part of its Base Erosion and Profit Shifting (BEPS) project. There are two dimensions of tax reform that the OECD has zeroed in on.
The first — so-called “pillar one” — strengthens the right of countries to tax corporate income from sales on their territories, regardless of where the company is legally located (a boon for most big economies and a loss for tax havens)... The second pillar attempts to set a minimum level of tax applied to all multinationals. The OECD estimates the two reforms would raise corporate tax revenues by 4 per cent worldwide, totalling $100bn annually.
In this backdrop, Kimberly Clausing, Gabriel Zucman, and Emmanuel Saez have a proposal to address the issue of base erosion and profit shifting by multinational corporations. They document that in 1985-2019, the global average statutory corporate tax rate has fallen from 49% to 23%, largely due to international tax competition, especially those involving tax havens. Similarly, in the US, the average effective tax rate on corporate profits fell from nearly 50% in the fifties to just 17% by 2018.
Multinational companies that have low effective tax rates in some foreign countries (what we call a “tax deficit”) would pay an extra tax in their home country... An effective action plan has three pillars: exemplarity; coordination; and defensive measures against non-cooperative tax havens... Exemplarity means that the United States (and any country that wishes to stop tax competition and profit shifting) should collect the tax deficit of its multinationals. We define the “tax deficit” as the difference between what a corporation pays in taxes globally and what this corporation would have to pay if all its profits were subject to a minimum tax rate in each of the countries where it operates. The computation of the tax deficit requires us to choose a minimum tax rate. One natural minimum rate is the headline corporate tax rate (i.e., the one that applies to firms that do not have foreign operations), but other rates can be used... For minimum taxes to be effective, it is important that the United States (and other countries) apply such taxes on a country-by-country basis, rather than globally... by blending haven and non-haven income, companies can treat the minimum rate as, effectively, a maximum tax rate on all sources of foreign income... For example, a 28 percent per-country minimum tax generates $63.8 billion in U.S. revenue using 2017 data, or $758 billion over the period 2021-2030...
The second pillar of our plan is international coordination. The goal should be a global agreement in which all countries agree to jointly adopt a country-by-country minimum tax. An agreement between the United States and the European Union would be an excellent start... One could also build on OECD efforts through the OECD/G20 base erosion and profit shifting (BEPS) process, moving beyond the recent focus on digital companies to propose a coordinated minimum tax that would address instances of under-taxation for all multinational companies. This would also allow broad coverage, since the majority of multinational companies are incorporated in OECD countries; 71 percent of Forbes Global 2000 companies are based in OECD countries in 2019. Expanding to the G20 would be even more comprehensive... Although the ideal solution involves a great deal of international coordination, considerable progress can be achieved by a few leading countries—or even through unilateral action. Unilateral action can be the trigger that leads to new forms of international cooperation.
The biggest challenge with any such effort that of the collective action problem - who will bell the cat? Zucman and co point to how unilateral action, especially by the US, can be useful to start the process. In particular, they point to the example of the Foreign Account Tax Compliance Act (FATCA) of 2010,
FATCA imposes an automatic exchange of data between foreign banks and the IRS. Financial institutions throughout the world must identify who among their clients are American citizens and inform the IRS what each person holds in his or her accounts and the income earned on them. Failure to take part in this program carries stiff economic sanctions: a 30 percent tax on all dividends and interest income paid to the uncooperative financial institutions by the United States. Under that threat, almost all countries have agreed to apply this law. Emulating the United States, many other countries have secured similar agreements with tax havens and the automatic sharing of bank information has become the global standard since 2017. The OECD recently showed that $11 trillion of offshore accounts came to light in the 100 countries that apply this new exchange of information. A new form of international cooperation, which was deemed utopian 15 years ago, has become reality. In the context of the corporate tax, the United States (and other countries willing to take part in an agreement) could also apply sanctions on non-cooperative tax havens... One way to do so is to impose taxes on financial transactions with uncooperative havens (as in FATCA). Another possibility would be for the United States to take defensive measures against multinationals incorporated in non-cooperative tax havens. Concretely, the United States could collect a fraction of the tax deficit of multinationals headquartered in uncooperative states. What share? The share corresponding to the share of their global sales made in the United States.