Ahead of the G7 summit this weekend, we looked into who will win and who will lose from the recently proposed global minimum tax rate of at least 15% for companies. Among large Base Erosion and Profit Shifting (BEPS) countries for which data was available, we find that Poland, Spain, China, the Netherlands are clear winners; the US, the UK, Russia and Italy are relative winners; France, Japan, and Canada are neither winning nor losing and that Ireland, Brazil and Hungary are clear losers from the deal.
The G7’s decision has initiated a crucial negotiation process, which will include a virtual meeting of more than 130 nations on 30 June to agree on changes proposed by the OECD in relation to global taxation under the umbrella of the BEPS initiative. Next, a G20 summit will be held in Venice on 09 July for the endorsement of these agreements and then a possible sign-off is expected in October 2021 during another G20 meeting. In the meantime, and given the US’s endorsement of the OECD’s proposals, tense debates and negotiations emerged in countries such as Mexico (necessity to reduce tax loopholes), Ireland (necessity to increase the 12.5% corporate tax rate), Hungary and the UK (proposal of excluding financial activities from the agreement).
- Though the eventual implementation of this agreement will take a long time because of ratification issues, the initiative represents a unique moment of global fiscal convergence. In the long run, the global minimum tax rate for MNEs could impact economies’ potential growth via different channels:
- The capital repatriation or productivity growth channel: countries with corporate tax rates below 15% will be less attractive and MNEs could be tempted to repatriate capital into their domestic economy. This repatriation is likely to produce a positive productivity shock in the economy benefiting from it, whereas the country seeing a capital outflow will register a negative productivity shock with long-term consequences.
- The terms of trade channel: countries benefitting from capital repatriation will also reinforce their capacities of production and therefore reduce their dependency on imports (the inverse for countries with tax rates below 15%, which could face a higher dependency on imports).
- The public debt channel: capital repatriation will contribute to reinforce the growth potential of economies that see capital flowing back home. This will create new fiscal resources and contribute to reduce the level of debt as a percentage of GDP, or at least reduce its pace of growth. In contrast, countries that see their tax competitiveness deteriorating because of the global minimum tax could find it harder to stabilize their public debt.
- The public investment channel or crowding-in/crowding-out effect: countries that gain in competitiveness thanks to this global rebalancing could have a higher incentive to increase the size of public investment as a percentage of GDP, in particular in a context where demand for public goods is expected to rise post Covid-19. This channel of transmission is ambiguous in terms of impact as both crowding-in or crowding-out effects could follow. We assume a continuation of the five-year trend preceding the creation of the tax.
- The corporate tax revenues channel or redistribution channel: higher corporate tax revenues as a percentage of GDP could follow a movement of capital repatriation for countries with a corporate tax rate above 15%. Countries with corporate tax rates below 15% will suffer from a lower level of competitiveness and register capital outflows, followed by lower fiscal revenues normally earned from corporate profits of foreign firms.