Sovereign nations don't require unanimity or consensus among other sovereign nations to deal with issues such as cross-border tax evasion by individuals and tax avoidance by multinational corporations, suggested Gabriel Zucman, associate professor of economics at University of California, Berkeley, whose work was featured during the webinar.
"We're at the beginning of a new era: The rise of inequality and wealth forces us to rethink long-held tenets in the field of taxation," Zucman told Law360 after the event.
The intergovernmental Organization for Economic Cooperation and Development and Group of 20 nations had planned a ceremony to sign off on what they consider the most viable alternative to the transfer pricing system presented thus far, the so-called two-pillar solution. However, wavering political support led to the OECD, often described as a think tank for rich countries, to rethink the timeline to implement the 15% minimum tax and reallocation of more taxing rights to countries where companies have customers, but lack physical presence allowing taxation under current rules.
Zucman and Marcello Estevão, the World Bank's global director for macroeconomics, trade and investment, agreed that the two-pillar solution would not address developing countries' concerns about profit shifting by multinational corporations for a number of reasons. Estevão used a Portuguese idiom to describe the OECD inclusive framework's mission, saying it is "part of our fight of big dogs" and "is not really about developing countries."
"The motivation was really to kind of hit the tax havens, that was the true motivation, in my interpretation," Estevão said.
A U.S. company's profits should reach U.S. tax authorities, rather than "tax havens" such as Panama, according to Estevão, who praised Zucman for bringing up broader points about how the deal would impact tax incidence worldwide.
The Berkeley economist, author and director of the state-funded EU Tax Observatory told the audience the global tax deal's current iteration would ensure most forms of harmful tax competition continue. The deal primarily benefits the owners of multinational corporations, which tend to be very wealthy, and in that scene would bake "racist" dimensions of wealth and income inequality into the future global economic order, Zucman said.
He said more progressive tax regimes would improve compliance by building public confidence in the system's justice, and more funding for tax authorities would allow them to pay for improvements to revenue-collecting capacities, according to a World Bank survey of 30,000 respondents in developing countries.
Capacity is a problem for countries, said Carolina Sánchez-Páramo, the World Bank's global director of poverty. Some "only have a limited bandwidth to bark at a limited number of trees," she said.
Zucman described how modern tax systems began in the U.S., the U.K., France and Germany during the late 19th century and early 20th century with progressive income taxes on estates, noting incomes in those nations already ranked in the top 1% globally.
While they began by taxing the rich, governments gradually moved toward regimes such as value-added sales tax with help from organizations such as the World Bank and International Monetary Fund, Zucman said, as well as payroll taxes. Those institutions helped governments develop policy alternatives to tariffs, which reduced international trade, Zucman said.
"The work of the World Bank is fundamental for the creation of modern tax systems throughout the world," Zucman told Law360 after the webinar. "I was glad to learn more during the discussion about its current work assisting low- and middle-income countries."
Estevão said the 15% minimum tax rate agreed upon by nearly 140 countries is too low, but added, "in the discussion there was a political agreement.'' The U.S., he added, initially proposed a 25% minimum rate.
Zucman said the deal presents a unique opportunity to address tax competition characterized by countries lowering rates to attract investment by multinational corporations.
"This type of tax competition where countries cut their tax rates to attract production — you know, real activity — has even bigger redistributive impact across nations than pure paper shifting," Zucman said. "Pure paper shifting doesn't affect how much capital there is in your country, doesn't affect the wages of workers."
That the agreement addresses some of those issues is a very positive development, Zucman said.
"Are we really sure that we don't want them to do anything about the real tax competition that has an even bigger effect?" Zucman asked.
For Zucman, the real tax competition involves both individual and corporate taxpayers moving to low-tax jurisdictions, then "preying on production" in a global "zero-sum" game.
U.S. Treasury Secretary Janet Yellen continues to herald the deal as capable of halting a global, decadeslong "race to the bottom" in corporate taxation, but the executive branch lacks support from a simple majority of Democratic senators to pass the terms into domestic law. The Biden administration would need two-thirds of the Senate to give advice and consent for the president to ratify a treaty, although Yellen suggested last September that there are "a number of ways" Congress could implement the deal, describing the treaty ratification process as "one way."
"This is beggar-thy-neighbor policy, but it's more harmful than just paper profit shifting, because it destroys jobs in a number of countries, it reduces capital investments, it reduces employment — so it affects the lives of millions of people," Zucman said. "I think it's a big risk to say we don't want to tackle that issue."
--Additional reporting by Natalie Olivo, Todd Buell and Matt Thompson. Editing by Roy LeBlanc.
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