Editorial: International Tax Reform Can Counter Downsides of Globalization
International tax reform has taken an important step forward. Following the agreement reached by the Group of Seven (G-7) finance ministers in June, the Organisation for Economic Co-operation and Development (OECD) recently announced that 130 of 139 countries and jurisdictions involved in its tax reform negotiations have signed a joint statement that explicitly backs the introduction of a global minimum corporate tax rate of at least 15%, ensuring that large multinational corporations (MNCs) pay taxes where they operate and earn profits. The member states that signed include China, India and other emerging economies. The 130 countries and jurisdictions represent more than 90% of global GDP. The OECD also indicated that the remaining technical work and plan for the tax reform framework are expected to be finalized this October and effectively implemented in 2023.The most sweeping international tax reform in a century is approaching its final stages. International tax reform negotiations have been going on for more than a decade and had been at an impasse. In recent years, with the gradual change in attitude of a variety of countries, especially the United States, negotiations have embarked on a benign track. International tax reform is not only about taxes but also about global governance rules; in essence, it is the reflection and requirement of economic integration. Even though globalization cannot be stopped, it has been accompanied by long-running dissatisfaction. Since the global financial crisis, unilateralism, protectionism and populism have been rampant, leading to the partial decline of globalization. In this context, the widespread support for international tax reform bolsters globalization and marks its self-correction. The steady progress of economic globalization and multilateralism is inseparable from the adjustment of tax rules. In other words, international tax reform not only conforms to the requirements of economic integration, but it also serves as their shepherd.
International tax reform has a special background. Since the 1980s, countries around the world have adopted tax reduction as the mainstream policy choice, creating a “race to the bottom” in corporate tax rates. This global race is not unhelpful for countries’ growth and prosperity, and can also promote institutional competition among countries. However, countries are inevitably becoming trapped in a competition to see which can lower their tax rates to the greatest extent. To make matters worse, MNCs, especially certain internet giants, arbitrage among different tax systems in different countries to evade taxes, transferring profits through so-called “tax havens.” Although this is a rational choice for enterprises looking to serve their own interests, it is harmful to the international community. According to estimates by the OECD and a United Nations’ expert group, the total loss in tax revenue caused by global MNCs’ tax avoidance amounts to hundreds of billions of dollars every year. This “race to the bottom” violates any notion of fairness in taxation, widens the gap between the rich and poor, and increases dissatisfaction with globalization among its losers.
As such, abolishing irrational tax policies worldwide has become a common desire of countries despite their different reasons for supporting it. This shared desire is the basis for a breakthrough in global tax negotiation.
The plan for international tax reform includes “two pillars.” The first will ensure that MNCs — especially the tech giants such as Google, Apple and Facebook — pay their fair share in markets where they do business and earn profits. It will also ensure a fairer distribution of the profits of MNCs to the governments of the countries where they earn those profits, regardless of whether they have a physical presence there. The second pillar seeks to regulate finance and tax competition among countries through the introduction of a global minimum corporate tax. The OECD estimates that a global minimum corporate income tax with a rate of at least 15% will generate around $150 billion in additional tax revenue for countries annually. The planned reform also targets “tax havens” in an effort to put an end to this “race to the bottom.”
We need to understand the truth about international tax reform. First and foremost, it is intended to rectify a deviation and make efforts to restore tax justice worldwide. Although tax reform will increase MNCs’ tax burden, particular emphasis is placed on structural tax burden adjustment rather than simply increasing tax. At a time when populist sentiment is running high, the international community should avoid the notion that “it is better to impose higher taxes on MNCs” because excessively high tax rates will restrain economic growth, thereby reducing tax revenue and harming the well-being of everyone. With any tax reform, it’s always necessary to strike a balance between efficiency and equality.
The Chinese government’s signing on to the international tax reform statement is clearly based on a well-thought-out strategic judgment. In the current international environment, it is of special significance, showing that China, the biggest beneficiary of globalization, is resolved to “champion cooperation over confrontation, open doors rather than close them, and focus on mutual benefits instead of zero-sum games.” It is generally believed that the introduction of a global minimum corporate tax rate won’t have much impact on China. Some have concerns about the actual tax burdens on high-tech enterprises, but exceptions can be sought through negotiation. Generally speaking, China’s active participation in negotiation and consultation is conducive to adapting to the new trend of international tax reform in advance, and turning passivity into initiative.
Embracing international tax reform is also a rare opportunity for China to advance its own tax reform plans. In the past, the drive toward competitive tax cuts around the world unfolded with the same logic across China: local governments scrambled to introduce explicit or covert tax breaks and preferential policies. This vicious competition, which simply relied on low tax rates or preferential policies to promote investment, ostensibly attracted or retained investment while actually harming tax justice in a way that has been disadvantageous to the development of all regions in the long term. Rather than tax policy, things like a region’s business environment, industrial chain and infrastructure are what actually attract investment. China should take advantage of international tax reform to enhance its national governance capacity, improve the tax system and clean up local tax policies. To this end, promoting fairness in the domestic tax system should be the priority.
Regardless of the kind of political and economic ideas people hold, they cannot turn a blind eye to the problem of global income disparity. MNCs engaging in tax evasion have long been the target of public criticism. Left unchecked, this phenomenon will definitely undermine globalization. International tax reform is expected to bring about a turn for the better in globalization. However, it should also be noted that the consensus on the international tax reform plan is only the first step toward reforming of the global tax system, and a lot of technical work remains to be done. Even if the plan is implemented as scheduled in 2023, policy coordination and information sharing among countries will still be subject to an international political and economic situation in which disputes and friction will emerge. This breakthrough is worthy of celebration, but there is still a long way to go.
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