29/06/2021 – Business / Corporate Tax / Corporation / LBS / Marcel Olbert / Global
Opinion – Will we get a global minimum corporate tax rate?
Dr Marcel Olbert, Assistant Professor of Accounting at London Business School (LBS) considers the shape of global tax reform following the G7 agreement.
Following US President Biden’s proposal for a global minimum tax for multinational companies, the G7 group of leading economies are taking their first steps to harmonise the taxation of such businesses with the aim of preventing aggressive tax planning. LBS’s Dr Marcel Olbert – whose research focuses on the effects of corporate taxation – explains how his research shows tax authorities can influence corporate behaviour and discusses implications for the current policy debate.
Given the growth in digitisation of business and the rise of international tech giants, capital is increasingly mobile, enabling some organisations to shift profits from one country to another to secure the most favourable tax regime. This has led the G7 to agree closer co-operation on the taxation of multinational firms.
Commenting on the recent proposals of US president Biden and the G7 agreement, Marcel Olbert, Assistant Professor of Accounting at London Business School, said: “Calls for an international minimum corporate tax rate have been gaining momentum to try and reduce the chance of a ‘flight to the bottom’ in terms of corporate tax rates, as nations strive to attract businesses to locate within their borders.
“Now that the G7 have taken their momentous first steps towards cross-border agreement, this paves the way for further collaboration between the 20 OECD countries when they meet later this year.”
Dr Olbert went on to point out that businesses thrive on certainty: “A clear and co-ordinated approach to international tax would mean companies can plan with more confidence,” he advised. “Ultimately, such clarity would be far more important to most organisations than a small increase in taxes.”
Identify value creation to identify taxable activity
Contrary to public view, the academic said that to date there has been no systematic empirical evidence demonstrating that digital companies engage in particularly aggressive corporate profit-shifting as a means to avoid taxes. However, he recognises the importance of determining where businesses in today’s digitised world actually create value. Without this information, it is hard to align taxes with economic activity.
Dr Olbert’s research builds on policymakers’ goal to identify routes that provide factual information to demonstrate the extent of company activity in a particular jurisdiction. In a recent study, he and co-author Lisa De Simone showed that companies do indeed try to align economic activity with their tax strategies when global tax authorities put more weight on taxing profits where companies really operate. In a discussion of the OECD’s proposal on how to tax digital companies, he notes: “If you look at real transactions as evidenced by company data, it would be possible to identify value creation and hence taxable activity. Armed with this knowledge – and the political and legal backing of agreements such as those made by the G7 – tax authorities should be able to curb the most flagrant forms of tax avoidance by multinationals.” Nonetheless, he conceded that: “although factual and accessible information can be found, there is still a long way to go before any legislation actually comes into force”.
Mr Olbert was also keen to warn that tax is just one of many factors that influence company decisions: “My research and prior academic work confirms that fiscal measures do make a difference to company behaviour, but they’re not everything. Dublin, for example, is an established centre for tech companies, with an informed workforce and a whole infrastructure to support these businesses, which has taken years to develop. So, a change in tax rates in Ireland is unlikely to suddenly send these companies elsewhere, although a substantial change in rates could influence an organisation which is on the brink of a decision.”
Potential winners of globally-aligned corporation tax
Dr Olbert suggested countries boasting the strongest economic activity would likely be the biggest winners, if and when the proposed reforms come into play. “I think it’s logical to project that countries with large consumer markets in Europe, such as Germany, France and Italy, would benefit the most,” he said. “On a more global scale, it would mean that a lot of tax revenue could be allocated to India and China too.”
It’s possible that the captains of business might even welcome implementation of a higher standard rate of corporation tax, suggested Dr Olbert, going on to explain this viewpoint: “Many digital companies are concerned about the introduction of digital services taxes across Europe. Having different regulations between countries increases their compliance costs, so some multinationals might actually welcome a co-ordinated approach. Investors also like certainty, so global coordination on tax policy is probably more valuable than a slightly lower rate to corporate decision-makers.”
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