A Global Minimum Corporate Tax Is A Boost For Global Governance, And For A Carbon Tax

Global governance received a booster shot from G7 leaders at Cornwall in early June when they approved a global minimum corporate tax (GMCT). The new levy, which has since been approved by 130 countries, sets a global minimum in corporate taxes which multinational corporations have shell out in jurisdictions they operate in. It was hammered out in record time under the tutelage of the Biden administration and will be rolled out starting 2023.

The question is can the GMCT serve as a model for global economic governance, where developed and developing countries come together in a spirit of cooperation? Such a spirit has been hopelessly absent since the pandemic, with the G7 and G20 squabbling over vaccine supplies and in providing economic assistance to Africa. On the tax front, Europe signaled its impatience by going its own way in implementing a digital services tax, which attracted the ire of the Trump and Biden administrations. The digital levy is now in a standstill as negotiators work out a global levy along the lines of the GMCT.

What makes the GMCT a particularly attractive model is both its simplicity and complexity. It is a simple and easy-to-understand because it places obligations on the corporate sector to be a responsible tax-payer in jurisdictions they operate in. The GMCT squarely addressing so-called Pillar 1 issues—where companies are obliged to pay national taxes based on their business activity in a country, regardless of whether they have a physical presence. While Pillar 1 primarily targets the activities of America’s big-tech firms (although it has wider applicability), Pillar 2 is more comprehensive by introducing the principle of a minimum effective tax rate which operates as a top-up where income is taxed below the GMCT.

Corporate taxation is, of course, riven with complexity and opacity, which the GMCT attempts to address, but there are bound to be grey areas which will allow for tax arbitrage practices of the past. One such grey area cited by experts is generous tax incentives on investment in machinery provided by developing countries to attract and retain foreign investment. Under the new rules, such incentives will be exempt, a major victory for developing countries like China and India.

Similarly, the financial sector has also been carved out on grounds that banks and asset managers already pay taxes in their jurisdictions. Early estimates suggest that G7 countries, as the largest originators of MNCs, will be a huge beneficiary of the GMCT, while the gains for middle- and low-income countries to be marginal at best.

Despite potential problems with GMCT implementation, its design could be emulated for the introduction of similar levies elsewhere. Agreement on a global carbon tax could embed GMCT principles with a twist—of paying where you pollute—but getting there would require a shared global agreement on the price of carbon. The IMF recently estimated that at the global level, additional measures equivalent to a carbon pricing of $75 per ton or more are required by 2030, which in effect would set a global floor like the GMCT.

The European Union is threatening to take a unilateral approach by proposing to introduce a carbon border adjustment mechanism (CBAM), which at its heart would place a high tariff on imports on selected products from countries deemed to be less ambitious in pursuing global climate goals. The CBAM may well be an attempt by the EU to force America (which has already thrown cold water on the proposal) and other countries into a global agreement on a global minimum carbon tax.

As countries prepare for this November’s Glasgow summit, they should look closely at the GMCT. A global agreement on carbon pricing and taxation would be a game-changer for the planet compared with the more modest goals of the GMCT. Either way, it will prove or disprove that global cooperation is alive and kicking in the post-Trump era.