Globalisation
The world’s biggest private tax havens Rank 1 2 3 4 5 6 7 8 9
Jurisdiction
Cayman Islands US
Switzerland Hong Kong Singapore
Luxembourg Japan
Netherlands
10 11 12 13 14 15 16 17 18 19 20
Source: Visual Capitalist
countries as much as $240bn in lost revenue annually, amounting to up to 10% of global corporate income tax revenue. GloBE’s roots, therefore, are firmly planted in the idea that governments must collaborate to tackle BEPS effectively in a globalised and digitised business landscape. Anticipated to be a radical change in international taxation, GloBE’s rules first entered the financial lexicon in December 2021. “The GloBE rules are not mandatory but have been agreed as a ‘common approach’,” the OECD notes. However, the European Commission released a proposed European Union (EU) directive to incorporate Pillar Two rules into EU law, which would expand their scope across the bloc.
The international pledge, for its part, has received support from leading names in finance. In a 2022 opinion editorial, for instance, a senior official at the World Bank argued that the BEPS Actions Project, complete with 15 core actions, has made “great strides” in addressing low and zero taxation, increasing tax transparency and implementing multilateral mechanisms for dispute resolution. Yet as experts explain, a challenge has long centred around the varied tax rates across borders. “Some policymakers have long been concerned about companies stashing profits in low-tax jurisdictions to avoid paying taxes in their home countries,” says Daniel Bunn, president and CEO of the Tax Foundation.
Fair enough: Bahrain, the Bahamas, Guernsey and the Isle of Man all boast corporate tax rates of
20
British Virgin Islands UAE
Guernsey UK
Taiwan
Germany Panama Jersey
Thailand Malta
Canada Qatar
Region Caribbean
North America Europe
East Asia
Southeast Asia Europe
East Asia Europe
Caribbean Middle East Europe Europe
East Asia Europe
Caribbean Europe
Southeast Asia Europe
North America Middle East
0%. The UAE, on the other hand, comes in at up to 55%, while Brazilian companies pay up to 34% and German ones 30%. For its part, the global average corporate tax rate is 23.64%. The State of Tax Justice 2022 report found that at least one of every four tax dollars lost to multinational corporations using tax avoidance havens could be avoided. Releasing government- collected transparency data could achieve this, the report claimed, information that has been kept private since at least 2016.
As Dr Pie Habimana, lecturer at the Faculty of Law at the University of Rwanda, explains, a logical solution is to oblige countries to set minimum corporate tax rates, preventing unscrupulous firms from border hopping whenever revenue officers come knocking, or else fleeing overseas through a tangle of subsidiaries. “Since this contributes to the erosion of tax bases in high-tax sovereignty,” Habimana says, “the only way to prevent this is to tax back the untaxed amount up to a global minimum tax rate.” As a result, GloBE’s goals may be cited as twofold: to put a line under tax competition with a 15% minimum global rate, and reduce the incentive for profit shifting. As Bunn adds, preventing a “race to the bottom” when it comes to national tax policies could well be a third.
A flawed rule?
These lofty aspirations are all well and good. But for some insiders, GloBE is fighting the last war. As Bunn points out, worries about race-to-the-bottom tax regimes are increasingly outdated, with global corporate tax rates already levelling out around 20%, even as the 2010s saw governments introduce anti-avoidance rules in areas that provide more flexibility to enforce a crackdown.
General anti-avoidance rules (GAARs) have risen in prominence recently, with the UK, Poland and India introducing them in 2013, 2016 and 2017 respectively. Shadowing the dictum that with great power comes great responsibility, GAARs give tax authorities a tool to rapidly close new tax loopholes, regardless of previous enforcement. More fundamentally, Bunn suggests that GloBE draws an arbitrary line between tax incentives and direct subsidies to businesses, creating opportunities for savvy governments to mitigate the impact of the top-up tax. In addition, he says it uses a novel, extraterritorial enforcement mechanism that is the focus of significant political scrutiny, and risks legal uncertainty. That’s hardly surprising: GloBE gives countries a right to tax overseas profits beyond their own borders. Furthermore, following research into the impact
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