The future of global corporate taxation is more uncertain than ever

Authors: Martin Hearson & Rasmus Corlin Christensen
Date:
Blog

The global fight over how—and where—to tax the new digital economy is raging on. Just last week, the Office of the US Trade Representative (USTR) published the conclusions from its investigation into France’s new tax on large tech companies, such as Apple, Facebook, and Google. The USTR found that the French tax discriminates against US companies, and it proposed retaliatory tariffs on French wine, cheese, and other products worth $2.4 billion. And this is the French tax that, according to Joseph E. Stiglitz, Todd N. Tucker, and Gabriel Zucman in Foreign Affairs, “does not go far enough.”

At the same time, the Trump administration is threatening to pull the plug on global tax negotiations at the Organisation for Economic Co-operation and Development (OECD), where more than 100 countries have been working to find consensus on a new global tax agreement since 2013. Last Tuesday, Trump’s Treasury Secretary Steve Mnuchin called for a major watering down of proposals on the table and a suspension of all unilateral initiatives like the French digital tax.

The Franco-American conflict is illustrative of the increasing rift in global tax politics, where economic and political transformations are fundamentally reconfiguring the battle lines. This makes the global negotiations unusually hard.

Most prominently, these transformations are splintering the historical alliance at the core of the global tax system: The US and Europe. Since its foundation in the early-20th century, the global tax system has been defined by the mutual interests of large developed countries across the Atlantic.

But now, the rise of the “digital economy” is driving a wedge between the US and Europe. The power of American tech giants is viewed with more skepticism in Europe, where there are comparably few large home-grown tech firms, and many political leaders feel that US firms are not paying the taxes that they should in Europe. Apple is still in court with the European Commission over a decision demanding the tech giant to repay $20 billion in unpaid taxes to Ireland. And more than 10 European countries have announced or implemented special taxes on digital firms, including the UK, Spain, and Italy.

However, Europeans are not alone in wanting to tax the proceeds from the new digital economy. Other large countries, such as India, Russia, and Canada, have also sought new rules to grab a larger slice of the digital tax pie.

The proliferation of unilateral initiatives is a reaction to what many governments perceive as “too slow” progress in global tax negotiations. Historically, these negotiations brought together just a small group of OECD member states; but today, negotiations have been made more difficult by the rising power of non-OECD members, such as India and China, who want to pursue their own agendas.

Developing countries, too, are gaining a formal voice in global tax negotiations. More than 130 countries formally participate in discussions at the OECD’s “Inclusive Framework,” which has meant an escalating complexity of interests and coalitions. Yet, there remain serious criticisms of the true inclusiveness of the Inclusive Framework and the power balances that disadvantage, in particular, African governments. If developing countries are not listened to, they may ultimately not support a new global agreement.

For this reason, we are skeptical of Stiglitz, Tucker, and Zucman’s suggestion that global tax governance should operate through a club model in which “the biggest developed economies (the United States and western European countries) … move first, demanding that firms that trade in their markets follow the new rules and using diplomatic pressure to get other countries to adopt a similar system.” The genie of global inclusiveness is quite rightly out of the bottle, and the survival of the international tax regime rests on making that more, not less, meaningful.

The OECD secretariat—the Sherpa of the negotiations—has tried hard to bridge the gaps, tabling a proposal for a “unified approach” that combines suggestions from multiple bargaining groups to overcome frictions and move discussions forward. The approach would keep large parts of the global tax system as is but also proposes new rules for taxing the “non-routine” profits of large digital and consumer-facing businesses based on a simpler, formulaic allocation of taxing rights amongst countries.

This approach, however, has been met with significant criticism. For a while, it looked like a new global tax deal could emerge around a US-France deal. But Mnuchin’s comments deriding the current direction of travel—which the US was a critical part in shaping—suggest that the US is unwilling to support new rules that depart from long-standing principles underpinning the global tax system, risking a further rise in foreign governments’ tax claims on American corporations. Talks between the US, France, and the OECD are now slated for January, at a time when the OECD had originally planned for high-level political agreement.

If global negotiations fail, countries will take matters into their own hands. Across the world, citizens are watching global tax discussions with an interest never seen before. The public is more engaged, media stories about the taxation of global corporations are now commonplace, and political leaders are increasingly pushed to react.

With more countries pursuing their own solutions, conflict is likely to escalate further, especially as the US is already clamping down on foreign governments trying to tax its tech giants. For now, the outlook for a new global tax consensus remains decidedly bleak. New battle lines, the complexity of negotiations, and a lack of strong political support have all put the future of global corporate taxation in unprecedented doubt.

This piece was first published by the Roosevelt Institute here.

Rasmus Corlin Christensen
Rasmus Corlin Christensen is a PhD fellow at Copenhagen Business School. He holds a Master of Science degree in International Business and Politics from CBS. Before joining CBS as a PhD Fellow, he worked for KPMG and the Ministry of Finance in Denmark.
Martin Hearson
Martin Hearson is a Research Fellow at IDS and ICTD's International Tax programme lead. His research focuses on the politics of international business taxation, and in particular the relationship between developed and developing countries. Before joining ICTD, Martin was a fellow in international political economy at the London School of Economics and Political Science, teaching courses on political economy and global financial governance.