Last 13 October 2021, the G20 Finance Ministers and Central Bank Governors endorsed the final version of the Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy adopted by 136 countries of the OECD/G20 Inclusive Framework on BEPS a week before. Following two years of negotiations, the final agreement introduces a minimum corporate tax floor of 15% (Pillar 2) and a reform of corporate tax rules for large businesses to better account for profits from digitalisation and branding (Pillar 1). The latter comes with a condition: that existing national Digital Services Taxes (DSTs) are withdrawn, which is what Austria, France, Italy, Spain and the UK have committed to in a joint statement with the United States (which in turn will refrain from trade sanctions).
The 2021 October agreement has been criticised for addressing developed countries’ needs only, and for not offering a comprehensive package of reforms covering the developing world. Perhaps in response to this, the G20 Finance communiqué notes “possible areas where domestic resource mobilisation efforts [for developing countries] could be further supported”.
All in all however, the global tax agenda has gone a long way since 1998 when the OECD timidly, but officially recognised tax competition as something that could be «harmful». The October 2021 agreement is indeed historical. It is comparable to the 2015 Agreement on Base Erosion and Profit Shifting aiming at aggressive tax planning and, before that, the 2009 G20 London Summit initiative on tax evasion (including the first public list of “non-cooperative” tax jurisdictions).
There are a number of dynamics underpinning the tax agenda, both the national DSTs and the broader OECD/G20 process.
First, there is the “we need the money” argument. Pre-crisis, we were already in a situation of under-funding of our economy to pay for social protection, to pay for minimum public services, infrastructure etc. The Covid-19 crisis is understandingly making matters even more pressing. There is for sure a compelling case for raising new tax revenues to pay for the crisis and the “whatever it takes” fiscal measures.
Second, there is the regulatory argument: taxation can help redress for market failures. Over the past decades, we have seen a revival of the discussion on innovative forms of taxation to address global challenges. DSTs are one example, when it comes to tax and digitalisation, but there is a parallel discussion on climate change (carbon tax) and financial speculation (Financial Transaction Taxation). Taxation for regulatory purpose comes with a slight contradiction with respect to the original purpose of tax, to raise revenues. These taxes are indeed designed as Pigouvian taxes: they are aiming at changing market behaviour and, if effective, they should in fact raise no revenue.
Third, there is the income inequality argument and the wish to make tax systems more progressive. Past tax reforms have put much of the tax burden on VAT and on households, leaving top personal income, inheritance, capital gains & corporate profits off the hook, this against exploding income inequalities. Unsurprisingly, there is a push towards more progressivity and to new forms of wealth taxation.
The concerns about under taxation of digital activities very much capture all three dimensions: raising revenues, addressing regulatory failure, and making it more progressive. The regulatory challenges of digital business models were already obvious before the Covid-19 crisis. This is particularly true on the competition front (creation of monopsonies and of private monopolies in the digital sector) and is the very reason for the introduction of DSTs and the parallel G20 process under Pillar 1. The asymmetrical nature of the Covid-19 crisis is also exacerbating further inequality levels and is putting under spotlight the under-taxation of the digital sector at large.
More broadly, the global tax agenda has to be contemplated in the context of unfinished business of globalisation, and the fact that we are still tolerating for multiple forms of regulatory races to the bottom. Harmful tax competition is one, but not the only one. There are similar concerns about unfair competition on the ground of labour rights — a decades old matter that has yet to be dealt with. On that, the creation of a minimum tax floor under Pillar 2 of the G20 October agreement should, hopefully, reduce the pressure of tax competition. But doing so, it could lead to unintended consequences. In a zero sum game, the decreased pressure on tax competition to attract foreign businesses could lead to increased pressure on other forms of regulatory competition, including labour rights and job quality.
Today’s international tax negotiations are much about international trade and attracting foreign investors, about who will have a better and bigger share of the globalisation pie and a bit less about the notion of fair taxation.