The Runback: Taxing Shenanigans
A new international agreement on corporate taxes is going to keep developing nations down
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The Monday Thought
Ireland has decided to sign up to a global deal that will push its corporate tax rate to 15%, marking a huge shift in its policy.
The G-7 and G-20 nations agreed earlier this summer to join forces to tackle tax evasion and harmonize rules across the globe. The plan, if implemented, would force multinationals to pay tax where they operate — not just where they have their headquarters — and would impose a minimum corporate rate of 15%.
The Republic of Ireland has one of the most attractive rates for corporations in the world at 12.5% and had, until now, refused to join the plan. Different Irish governments had fiercely defended the low rate, arguing it was a tool to attract businesses to a small economy.
It’s true that Ireland once was one of the most attractive places for corporation to locate their business in due to their tax rate. Many European multinationals relocated their operations to Ireland so they could still take part in the E.U.’s Schengen Area, but paid lower tax rates than other European nations.
And that’s what makes Irish acquiescence to the global tax rate so puzzling.
With Ireland signing on, the map will look like this (pending this map being updated to reflect Ireland’s participation; the purple countries have not signed it, and the grey countries are not eligible to sign)
Ireland was in a very advantageous position corporately because they were a well developed European country with a lower tax rate than any other well developed western country. They have squandered that opportunity. That’s made all the more confusing because Irish Taoiseach Micheál Martin is a member of Fianna Fáil, the more conservative leaning of the major Irish parties. Perhaps it has more to do with the more populist elements of Fianna Fáil, which like American populism favors higher taxes on corporations.
Regardless of Ireland’s participation or not, why is any country getting involved with this nonsense?
One of the most important things about our world economic system is making sure that your national tax and financial policies are advantageous to your national economic development. Artificially limiting your nation to a minimum tax rate of 15% for corporations is self-defeating.
What’s most damning about this is the fact that the highly developed economic nations can absorb a 15% minimum tax rate because major corporations are going to headquarter there and do business there regardless of a minimum 15% rate. Countries like the U.S., Canada, the U.K., France, China, and others like them are going to receive major economic growth regardless. But how does a minimum tax rate help countries like Argentina or Senegal, who might be positioned to grow their economy with lower tax rates?
There are five countries here that were eligible to sign the treaty and, as of yet, have not; Estonia, Nigeria, Kenya, Sri Lanka, and (ironically) Hungary.
Estonia, Kenya, Nigeria, and Sri Lanka were very smart not to sign onto the treaty. Just look at the map above. You’ll notice a few things about these countries:
They are the only country in their region that has not signed on to the treaty;
They have easy sea access;
They are near major industrial centers.
Why wouldn’t these nations then set their corporate tax rates lower than those of their neighbors? Why shouldn’t these developing economies take advantage of their position to became a magnet for local corporations.
Estonia isn’t that far away from Germany. Why wouldn’t German manufacturing firms consider relocating their corporate offices to Tallinn?
Kenya isn’t that far away from Middle Eastern oilfields. Why wouldn’t oil companies consider relocating their corporate offices to Nairobi?
Nigeria isn’t that far away from the rich natural resources of west Africa. Why wouldn’t these companies consider relocating their corporate offices to Lagos?
Sri Lanka isn’t that far away from India. Why wouldn’t Indian manufacturing and technology firms consider relocation their corporate offices to Colombo?
Hungary, the favorite of populist fanboys, is probably least able to capitalize on their success due to a variety of factors related to their totalitarian regime.
The global tax regime that these 140 developed countries have agreed to is another way to make sure that the haves are always ahead of the have nots. Much like many of the world’s environmental treaties, this agreement will make sure that participating countries can never lower their corporate tax rate to spur economic development and growth. The United States should withdraw from this agreement, not only to protect its own interests but to protect the freedom for economies to develop around the world.