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Minimum tax for multinational companies marred by loopholes

WASHINGTON (AP) – An ambitious 2021 agreement by more than 140 countries and territories to weed out tax havens and force multinational corporations to pay a minimum tax has been weakened by loopholes and will raise only a fraction of the revenue that was envisioned, a tax watchdog backed by the European Union (EU) has warned.

The landmark agreement, brokered by the Organisation for Economic Co-operation and Development (OECD), set a minimum global corporate tax of 15 per cent. The idea was to stop multinational corporations, among them Apple and Nike, from using accounting and legal maneuvers to shift earnings to low- or no-tax havens.

Those havens are typically places like Bermuda and the Cayman Islands where the companies actually do little or no business. The companies’ manoeuvres result in lost tax revenue of USD100 billion to USD240 billion a year, the OECD has said.

According to the report, released on Monday by the EU Tax Observatory, the agreement was expected to raise an amount equal to nearly 10 per cent of global corporate tax revenue. Instead, because the plan has been weakened, it said the minimum tax will generate only half that – less than five per cent of corporate tax revenue.

Much of the hoped-for revenue has been drained away by loopholes, some of them introduced as the OECD has been refining details of the agreement, which has yet to take effect. The watchdog group estimated that a 15 per cent minimum tax could have raised roughly USD270 billion in 2023. With the loopholes, it said, that figure drops to about USD136 billion.

ABOVE & BELOW: Nike; and Apple logos. PHOTO: AP

Over the summer, the OECD agreed to delay for at least a year – until 2026 – a provision that would have let foreign countries impose additional taxes on United States (US) multinational companies that failed to pay at least a 15 per cent rate on their overseas earnings.

The EU Tax Observatory noted that even under the rules of the 2021 agreement, companies would maintain some ability to evade taxes. Companies that have tangible businesses – factories, warehouses, stores and offices – operating in a particular country, for example, could continue to pay a tax rate below 15 per cent. That carveout, the EU Tax Observatory warned, could “give firms incentives to move production to countries with tax rates below 15 per cent”.

“This risks exacerbating the race-to-the-bottom with corporate income tax rates,” it said.

Another loophole lets countries offer tax credits, for such things as conducting research and investing in local factories, that can reduce companies’ tax rates below the 15 per cent mark and still comply with the 2021 agreement.

The Tax Observatory also expressed concern that the race by governments to grant tax breaks for green technologies to fight climate change “raises some of the same issues as standard tax competition. It depletes government revenues”.

It also “risks increasing inequality by boosting the after-tax profits of shareholders, who tend to be towards the top of the income distribution”, it said.

The EU Tax Observatory isn’t calling for an outright ban on green-technology subsidies. But it is urging governments to consider other policies to offset the financial gains to the wealthy from such tax breaks.

The group said that multinational corporations shifted USD1 trillion – 35 per cent of the profits they earned outside their home countries – to tax havens. American companies account for about 40 per cent of such global profit shifting.

Last week, US Treasury Secretary Janet Yellen said an agreement on a tax on companies that have no physical presence in a country but that earn profits there, such as through digital services, wouldn’t be finalised until 2024.