World free zones meeting reflects split over global minimum tax

European Union nations were set to vote today, Friday, on whether to confirm a proposed directive to impose a global minimum corporate tax of 15 per cent, starting January 1, 2023, in a bid to stop big multinationals from changing the location of their operations and headquarters to avoiding tax payment.

And like the divisions seen in Europe regarding the plan being led by the Organization for Economic Cooperation and Development and the Group of 20 big nations, G20, with Hungary voicing objection to the move, opposing sentiments were clear among delegates and presenters at the World Free Zones conference in Montego Bay this week.

The OECD estimates that between US$100 billion and US$240 billion, representing up to 10 per cent of global corporate taxes, is lost to global profit shifting every year.

Proponents of the move included James Zhan, director at the United Nations Conference on Trade and Development, UNCTAD, based in Geneva, Switzerland, and Pascal Saint-Amans, director at the OECD Centre for Tax Policy and Administration, located in Paris, France.

At the conference, held at the Montego Bay Convention Centre, Zhan and Saint-Amans shared platform with critics of the global minimum tax measure, including Scott Hodge, president of Tax Foundation in the United States, and Bogolo Kenewendo, a global economist and former minister of trade and industry of Botswana. They were part of a panel discussion on ‘Reforming the global tax system’ on Wednesday.

“The OECD needs to ask itself, what is more important in the long term for the health of local economies – a marginal increase in tax revenues or economic growth? These goals are not compatible,” Hodge declared.

He said the tax proposal represented an apparent reversal of the OECD’s position emanating from a March 2008 study by economists of the France-based entity, which, he said, determined that corporate income tax is the most harmful tax for economic growth, because of the highly mobile nature of capital and its sensitivity to high taxes. That study, he said, had recommended a greater focus on broad-based consumption and property taxes.

“In our perspective, the global minimum tax will raise the cost of capital, put sand in the gears of cross-border capital flows, impact foreign direct investments, FDI, while increasing the cost of compliance,” the American tax policy expert concluded.

No benefit for small nations

Kenewendo admitted to being conflicted between the positions that derive from strict economic policy analysis and those what must take into consideration the “necessary” issue of political expediency. She noted that countries such as Botswana, while having stronger soft incentives, like good government, macro-economic stability and access to large markets, still lose out in attracting foreign companies when less stable countries offer the companies big tax incentives.

Kenewendo said given the small turnover of most companies that African nations normally attract, and the high income threshold for the application of the global minimum tax, maybe ‘it was of no moment’ for African countries and other small economies, meaning that it mattered little.

“All African countries (each) attract less than US$0.5 million in FDI. When tax incentives are taken away, what is the selling point? The threshold is US$750 million for a company’s investment. On average, several of the companies we used to get earn only around US$10 million,” she pointed out.

The OECD estimates the minimum tax will generate US$150 billion in additional global tax revenues annually for countries around the world, but sceptics of the tax measure, like Kenewendo, argue that with the structure of world FDI flows, almost all of this new tax revenue will accrue to wealthy nations.

Significant impact

The OECD’s Saint-Amans noted that while taxation is at the core of sovereignty, the OECD proposals, which have been supported by some 137 nations, will have a significant impact for the operations of large multinationals, including those operating in free zones. It was his view that the proposal builds on steps already taken to make necessary reforms to the global tax system.

Meanwhile, UNCTAD director Zhan agreed that the minimum tax would have implications for the volume of investment flows, as well as for investment policies, but said it was UNCTAD’s position that the tax proposal is an important means of mobilising resources for development. Both developed and developing countries will benefit from the move, Zhan said.

He added that while the change in the volume in FDI flow was expected to be small, with more than 100 countries having developed and promulgated national industrial policies, it was important for those governments to undertake a staggered adjustment of investment policies to be able to benefit more from global FDI flows.

Other panellists were moderator Juan Carlos Hidalgo, a policy analyst of Costa Rica; Emilio Pineda Ayerbe, chief of the Fiscal Management Division of the Inter-American Development Bank; and Martin Gustavo Ibarra Pardo, president of Araujo International trade consultants of Colombia.

huntley.medley@gleanerjm.com