The debate over corporate taxation and tax revenues globally has followed a well-trodden path. Multinationals, it was said, are shifting profits to low-tax jurisdictions, depriving high-tax countries of much needed fiscal revenue.
The G20 tasked the Organization for Economic Cooperation and Development (OECD) with tackling ‘the problem’. This resulted in a range of measures under the Base Erosion and Profit Shifting initiative and the introduction of a global minimum corporation tax designed to create a minimum corporate tax rate of 15% worldwide.
The objective was to ensure that the income of multinationals in countries with tax rates of less than 15% could be taxed, or “topped up”, to a rate of 15%, in the higher-tax home countries of these corporations.
To determine the effect of the minimum tax, the OECD has undertaken further research and now come up with a result that runs counter to the narrative.
When the organisation looked at effective tax rates (ETRs), rather than headline rates, it found that more than half of the profits taxed below the 15% threshold were not at all in countries typically decried as “tax havens” but located in high-tax countries.
As it turns out, company affiliates in high-tax jurisdictions frequently benefit from tax incentives and other concessions that not only lower their effective tax rates well below the statutory rates but also below the 15% minimum threshold created by the global minimum tax.
The authors of the study ‘Effective tax rates of MNEs: New evidence on global low-taxed profit’ found much of the empirical debate had split jurisdictions into low-tax and high-tax jurisdictions without noting that effective tax rates within jurisdictions can vary substantially.
They concluded: “We estimate that high tax jurisdictions (jurisdictions with average ETRs of above 15%) account for more than half (53.2%) of global profits taxed below 15%, much more than very low tax jurisdictions (those with average ETRs below 5%) which only account for 18.7% of low-taxed profits.”
In other words, it is incorrect to assume high-tax countries are “losing” tax revenue mainly to low-tax countries because of profit shifting. They are in fact predominantly “losing” tax revenue as a result of their own domestic tax incentives.
The OECD researchers used a new dataset to capture the global activities of large MNEs and provided new estimates of the distribution of effective tax rates of large MNEs across and within jurisdictions. The results show that low-taxed corporate profits make up more than one third (36.1%).
Of the average annual net profits of US$5.93 trillion in the study’s four-year sample, 12.7% ($753 billion) are taxed at ETRs below 5% and a further 23.4% ($1.39 trillion) are taxed at ETRs between 5% and 15%.
In jurisdictions with statutory tax rates between 15% and 25%, around one ninth of profit is taxed below 5% and more than a third of all profit is taxed below 15%. Jurisdictions with STRs above 25% still tax more than a quarter of their profits at ETRs below 15%.
“These low-taxed profits in jurisdictions with high tax rates,” the OECD said in a press release, “highlight the revenue-raising potential of the global minimum tax, even in jurisdictions that have previously been thought to be high-tax.”