Joe Biden & The G20’s War on Tax Havens

At the recent G20 summit held in Rome, finance ministers from the world’s largest economic superpowers met to discuss a variety of global economic policies. One key development to emerge from the summit was the decision to implement a global minimum corporation tax, alongside a move to minimise tax avoidance through profit shifting.

This global tax reform was put forward by US President Joe Biden, who first proposed the solution in June of this year. The tax reform aims to stop multinational corporations from shifting their profits to low-tax countries – an activity known as Base Erosion and Profit Shifting (BEPS). Although the BEPS loophole has been around since the advent of globalisation, it has been high on the political agenda for many countries since the 2008 financial crisis. Despite this, research by the Organisation for Economic Co-operation and Development (OECD) found that BEPS still costs the global economy USD 100-240bn each year. Furthermore, it has been shown to disproportionally affect developing economies due to their higher reliance on corporation tax.

The BEPS loophole is made possible by the fact that corporations can sell goods and services globally, whilst only paying taxes in the low corporate tax rate jurisdictions in which they are based. Currently, companies have a wide array of countries to choose from, as research by KPMG found that there are almost 30 countries with a corporate tax rate below 15%. This, however, is about to change.

On 30th October 2021, leaders of the G20 nations agreed to Joe Biden’s proposal for a global minimum corporation tax of 15%. This minimum tax is expected to come into effect in 2023 and will apply to multinationals with total revenue greater than $890 million. For those with total revenue greater than $23.8 billion, there will be an additional 25% tax on their “excess profits” (i.e., those above 10% of their revenue). On top of this, the proposal contains a ground-breaking tax redirection strategy that aims to combat BEPS. The strategy will redirect some taxes to the countries in which goods and services are sold, rather than the country in which the multinational is based. As a result, it is expected to level the global playing field, and prevent multinationals from exploiting differences between tax systems in different countries.

Since the announcement, more than 130 countries, representing more than 90% of global GDP (according to the OECD) have signed up to the agreement. This list of countries even includes previous tax havens, such as the Cayman Islands, the British Virgin Islands, and Bermuda, who have joined due to a feature of the agreement that allows the home countries of companies to charge a ‘top-up’ tax to ensure the 15% tax rate is achieved.

Gone are the days when countries would jostle for business by undercutting corporate tax rates, leapfrogging one another in the race to the bottom. Instead, it appears that we are in an era of global cooperation. If the G20 nations are successful in enacting the tax reform, then it will undoubtedly change the way in which multinationals conduct business. Furthermore, it marks a shift towards a world in which politicians place a greater emphasis on global economic wellbeing, rather than focusing on their own national interests.