A truly progressive global tax reform must aim for the fair allocation of taxing rights for Global South countries, challenging the colonial foundations of the international financial system and giving all countries an equal seat at the table.
The G7’s agreement on global corporate tax reform last week - hailed by some as “groundbreaking” – in fact, shows the urgent need for more sweeping reform based on human rights principles. In an effort to address the challenges of taxing the digital economy and tech giants, and to crack down on corporate tax abuse, the agreement has proposed setting a global minimum tax of 15% for corporates on a country-by-country basis. However, this agreement by no means marks the necessary structural change in the neocolonial and unjust international tax system that serves the interests of the rich, while millions are struggling to make a basic living.
International tax rules currently impede individual States (particularly low and middle-income countries) to bring their national tax policies in line with human rights. The G7 agreement does not fix this failure. It also fails to meaningfully address inequalities within or between countries, or the very real ways in which abusive corporate tax regimes impede rights. Instead, the outlined proposal safeguards the interests of rich countries, counting on the Global South to continue accepting unfair deals made behind closed doors, and jeopardizing the present and future human rights of their populations.
CESR maintains that the international community cannot continue to accept decisions imposed by a group of powerful countries as a purported solution to the economic injustices most direly affecting the Global South. The G7 has no democratic legitimacy to act as the captain of the global economy. As the new Principles for Human Rights in Fiscal Policy make clear: “no State, nor the population under its jurisdiction, should be subject to a regime of regulatory standards - public or private, domestic or transnational - that has been built without providing opportunities for participation in its preparation, in accordance with the right to self-determination”.
Why are these discussions so important? Corporate tax is a crucial revenue generator for governments, especially in the Global South. These countries desperately need to increase the resources they have available to tackle the crises created by the pandemic, and realize the human rights of their population. And yet, powerful corporate actors and their allies are constantly pushing (through legal, quasi-legal and illegal methods) to reduce the tax they pay, either through lowering the official rate, granting of unfair tax incentives, or exploiting technicalities and loopholes. Multinational corporations have a lot of power over governments, especially resource-constrained ones, through threatening to withdraw or reduce their investment. At the same time, the current international corporate tax regime is manifestly unfit for purpose. It allows for widespread abuses, as it doesn’t at all match up to the challenges of our age of globally mobile capital and digitalization. As CESR has shown in our work over the years – and as recognized in the Sustainable Development Goals (SDGs) – this has profound implications for sustainable development and human rights. When corporate tax is low or evaded, workers and low-income individuals end up paying more, and public spending is pinched. Those who most urgently need quality public services and social protection – women, people living in poverty, indigenous peoples and other minority racial and ethnic groups – suffer the most.
As noted by a high-level UN panel on financial accountability, for developing countries to benefit from a global minimum tax, the threshold cannot be set too low. Noting the risk that the “minimum” could in reality become a ceiling, a 15% minimum tax rate is well below the statutory or effective rate for many countries and seeks to make an already complicated system even more ineffectual. Corporate income tax rates are higher in most low- or middle-income countries, for example.
On a positive note, the G7 announcement does signal an important recognition that profit shifting, tax abuses and tax havens have to be dealt with. However, there is still clarity needed on possible carve-outs for extractives, financial services and e-commerce companies, and still a long way to go to strike a truly human rights-aligned deal.
As part of their duties under Article 2(1) of the International Covenant on Economic, Social and Cultural Rights, governments are required to cooperate and mobilize “maximum available resources” for the universal fulfillment of these rights in accordance with human rights principles of equality, legality, efficiency, non-discrimination, and redistribution. In light of how most countries in the Global South are still battling the second and third waves of the pandemic, such a low threshold will constrict the public coffers of low-income and middle-income countries, further impacting their recovery.
Domestic efforts to address tax avoidance will only be fully effective if supported by international cooperation. States’ extraterritorial human rights obligations provide an essential framework to better delineate respective duties between countries over cross-border economic activity. The UN Committee on Economic, Social and Cultural Rights encouraged in this regard States parties to ‘combat abusive tax practices by transnational corporations’, in particular by ‘combat[ing] transfer pricing practices and deepen[ing] international tax cooperation, and explor[ing] the possibility to tax multinational groups of companies as single firms.
Ultimately, a truly progressive global tax reform must aim to increase the fiscal space and spending power of the Global South by giving them the ability to more effectively tax multinational corporations. This would provide an essential challenge to the colonial foundations of the international financial system. The work of ICRICT and the UN Tax Committee – as well as the FACTI panel - is notable in this regard for going much further than the G7.
A fair and democratic multilateral agreement on taxing the digital economy and reforming the existing international tax system for an equitable distribution of taxing rights cannot happen behind closed doors among an exclusive “club” of rich countries. Hence, CESR supports the call of many of our allies in civil society for an intergovernmental global tax body under the auspices of the UN, giving all countries an equal seat at the table.
Photo credit: HM Treasury