A global minimum corporate tax is in sight

Economic globalization gets a shot in the arm from historic agreement

Turns out, obituaries for globalization are premature.

At the beginning of July, more than 130 countries, including Canada, signed a historic global tax agreement to impose income taxes — at a minimum rate of 15 per cent — on large corporation’s cross-border profit. Countries such as Canada can now legislate minimum taxes without triggering reprisals from trade partners. In an age of the supposed decoupling of national economies, the agreement demonstrates that economic globalization is not only alive, but potentially healthier than ever before.

Tax policy is the last battleground of globalization—the tying together of the world through trade, investment, and other means. Nation states historically guarded their sovereign ability to pursue tax policy as they saw fit, including devel- oping their own corporate tax rates.

Why did countries including the United States, China and Russia — that seem to rarely agree on international law matters in recent years — say yes to a global minimum tax?

They did so because the costs of maintaining the status quo has increased dramatically in recent decades.

Multinational firms based in Canada and elsewhere take advantage of different national tax systems to engage in legal tax avoidance to reduce global tax liabilities.

This gaming of the international tax system results at times in “double nontaxation”: that is, countries where businesses or consumers are based often end up collecting negligible tax revenues while paper profits are shifted to tax havens that have no income taxes.

According to the Organization of Economic Co-operation and Development (OECD), governments are losing up to $240 billion (U.S.) a year due to these corporate tax avoidance strategies.

In 2013, the OECD and the G20 began an ambitious reform effort to tackle these problems.

The global minimum tax agreement is most significant outcome of these efforts to date. Governments also agreed to tax mega-tech companies like Facebook and Google where their customers are based.

Here, too, governments agreed on a radical departure from century-old international tax principles that emphasize taxing profit where value is added, which is normally where a company maintains a physical presence — such a presence is no longer required due to the advent of remote cross-border sales through the internet.

The two new global tax agreements are also meant to halt the rise of more than 100 unco-ordinated tax laws, like Canada’s proposed Digital Services Tax, which threaten to bog down global trade as companies would be forced to comply with all the different taxes.

All of this is great news for fans of globalization. Under conventional trade theory, a reduction of tariff and nontariff barriers to trade results in greater efficiencies for the domestic economy as a result of comparative advantage and specialization.

These views are often traced to an 1817 paper by the British economist David Ricardo who claimed that, under free trade, all participating countries should be better off.

Ricardo, however, did not envision that free trade would provoke countries to continually lower their corporate income tax rates to attract foreign businesses.

Despite this setback, globalization has still worked its magic. Since 1980, enhanced global trade and investment has pulled well over a billion people, mainly in China and India, out of desperate poverty to provide them with life-sustaining work. In other words, globalization has alleviated the suffering of hundreds of millions of our fellow human beings.

Wealthy countries such as Canada have also become even richer in the era of globalization as it provided jobs and business opportunities throughout the country.

Outstanding challenges from globalization nevertheless remain, including stagnating middle-class incomes and increasing income inequality in Canada and other Western countries.

The new agreement should allow Canada to raise more revenue from taxing large corporations and will inhibit income inequality because wealthy shareholders are the main winners when their corporate investments reduce global tax liabilities.

Further co-operative efforts among nations to strengthen globalization through fair and transparent international laws will encourage the spread of global prosperity and peace because, as economies are tied together, governments are less inclined to war against one another.

Assuming governments can work out the complex details to implement the new global minimum tax, globalization will remain alive and kicking to benefit Canada and its many trade partners.

Tax policy is the last battleground of globalization—the tying together of the world through trade, investment, and other means