The terrible global cloud that is the Covid-19 pandemic offered the world the glimpse of a silver lining this week. New tax proposals by Joe Biden mean that the economic emergency caused by coronavirus could result in big multinational corporations having to pay the fair amounts of tax they have avoided for so long. A breakthrough this week at the 135-nation Organisation for Economic Co-operation and Development talks in Paris may produce an agreement. Giants like Facebook and Google would then have to pay up – and not before time. This is definitely a step in the right direction.
Until Covid, the OECD corporate tax negotiations that began nearly a decade ago had been deadlocked, especially after the Trump administration refused to agree to anything that might raise taxes on US tech giants. Individual nations, notably in Europe, had started to impose or threaten stiffer local taxes, leading to retaliatory threats from Washington, but without inhibiting the big multinationals’ lucrative tax-avoidance strategies. Under Donald Trump, the US had even made clear that it reserved the right to allow American corporations to remain outside any new OECD-brokered regime. Mr Biden abandoned that demand in January.
Things have changed even more now. The underlying reason is that Mr Biden needs to raise corporate taxes to pay for his expensive Covid stimulus and infrastructure renewal plans. The US president wants to raise $2.5tn from corporate taxes, reversing a Trump-era cut. But in doing so, he also needs to tighten up a system that has meant firms like Nike and FedEx, as well as the tech giants such as Amazon which Mr Biden specifically criticised last week, have paid little or no US federal tax for years. He also has to find ways of preventing US corporations from simply moving their profits offshore, as firms including Apple and big-pharma companies have been doing for years.
The upshot is the proposal made by the Biden administration. Under it, the very largest global companies – probably about 100 of them, and including tech and non-tech – would pay levies to national governments as part of a deal that sets a global minimum tax which the US wants to see at 21%. The plan would create stability to allow the administration to increase corporate taxes at home without the fear that other countries would undercut it with rates as low as Ireland’s current 12.5% corporate tax, divisive competitive tactics that have fed the multinationals’ profit-shifting strategies. This could bring an end to what the US treasury secretary, Janet Yellen, has criticised as a race to the bottom and has been dubbed a low-tax wild west.
There have been diplomatic signs this week that the US proposal may signal a breakthrough. This could in turn lead to an OECD agreement as soon as July. But an agreement, while desirable and welcome, would not be the end of the story. Unless and until the global taxation system is made truly watertight, the danger that corporations will continue to try to hide their profits in tax havens will always remain.
This puts Britain’s immense responsibilities in the spotlight, because several UK overseas territories and crown dependencies continue to have low or zero tax rates. These include Guernsey, Jersey, the Isle of Man, the Cayman Islands, the British Virgin Islands and Bermuda. The last three of these were recently ranked by the Tax Justice Network campaign as the three most significant enablers of corporate tax abuse in the world. Britain itself was ranked number 13. Mr Biden may have engineered a breakthrough, but Boris Johnson and Rishi Sunak must play a unflinchingly committed part if it is to succeed.