How global tax reform can boost climate change fight and create a fairer world

The money to fund the urgently needed changes to our economies exists, and it sits in the accounts of multimillionaires hidden in tax havens
Taxing multinationals better is a chance to avoid the global warming that will have devastating consequences for humanity

Eva Joly

Published: 6:45am, 2 Sep 2021

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A “code red for humanity”. UN Secretary General Antonio Guterres could not have summed up better the chill that grips everyone when reading the report published by the Intergovernmental Panel on Climate Change last month.

Natural disasters, water shortages, forced migrations, malnutrition, pandemics, species extinction – it is scientifically established that life on Earth as we know it will be inescapably transformed by climate disruption when children born in 2021 turn 30.

This is already happening. It was illustrated this summer by the rainfall that plunged China and Germany into mourning, the burning forests from North America to Siberia and the increasingly devastating hurricanes in the Caribbean.

This will now be our lot, with unprecedented human consequences. Specifically in Asia, heatwaves will continue to increase, fire seasons will lengthen and intensify, heavy rains will amplify, shorelines will retreat and coastal areas will shrink.

There is still a window of opportunity to avoid the worst by limiting global warming to 1.5 degrees Celsius compared to the pre-industrial era, but this window is closing. We must urgently and radically decarbonise our economies, put an end to deforestation and replant wherever possible. On top of that, we must also reduce our energy consumption and massively develop renewable energies.

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However, implementing what should no longer be called a “transition” but an energy “switchover” has a cost. The plans just announced by the United States and the European Union to halve their carbon emissions by 2030 must be financed, but we must also help developing countries whose economies are devastated by Covid-19 do the same.

The money exists, so we must go and find it where it is. It sits in the accounts of multimillionaires hidden in tax havens, and especially those of multinationals which for decades have not paid their fair share of taxes.

This is why the Biden administration has announced it will tax the profits of the foreign subsidiaries of US multinationals at a rate of 21 per cent. It has called on the world to do the same by adopting a global corporate minimum tax rate.

In concrete terms, if a US multinational declares its profits in a low-tax country such as Ireland, where it would only pay a rate of 12.5 per cent, it would have to pay the difference of 8.5 per cent to the American tax authorities.

With this initiative, Washington wants to put an end to tax havens and the race to the bottom in corporate taxes. This is an urgent matter as global nominal tax rates on firms’ profits have fallen from an average of 40 per cent in the 1980s to 23 per cent in 2018.

This means fewer tax resources to finance public services such as education, health, gender equality or the fight against climate change. At this rate, corporate taxation could fall to zero by 2052.

Boosted by the US announcement, the negotiations for the reform of the century-old international tax system have reached a first step under the aegis of the Organisation for Economic Cooperation and Development (OECD), described by its signatories as “historic”.

However, this is far from being the case. It is true that more than 130 countries involved agree to tax multinationals based on objective factors such as sales, but employees and access to resources should also be considered.

In reality, these new rules would apply to about 100 companies worldwide, since they only apply to those with sales of more than €20 billion (US$23.6 billion) and profits of more than 10 per cent. Moreover, they exempt the financial sector. These tax resources will therefore go primarily to rich countries.

Worse, countries must commit to abandoning taxes on digital companies, depriving themselves of precious resources. This explains why two major African economies, Kenya and Nigeria, have refused to endorse the agreement.

Developing countries will also have to submit to international arbitration in the event of a dispute between their tax authorities and multinational companies, which they fear will be at their own expense.

That’s not all. The OECD agreement provides for the adoption of a global tax at a minimum rate of 15 per cent. This is a far cry from the US ambition of 21 per cent, and even further from the 25 per cent advocated for by the Independent Commission on the Reform of International Corporate Taxation, of which I am a member, along with economists Joseph Stiglitz, Thomas Piketty and Gabriel Zucman, among others.

Despite the highly unequal distribution proposed by the OECD, a global minimum rate of 25 per cent would bring in nearly US$17 billion more per year for the 38 poorest countries than a rate of 15 per cent. That would be enough to vaccinate 80 per cent of their population against Covid-19.

Again, all is not lost. Negotiations continue until October and a group of rich countries and developing countries are determined to fight for a fairer reform. Taxing multinationals better is also a chance to avoid the global warming that will bring devastating consequences for humanity. The future is in our hands, but time is short.

Eva Joly is a member of the Independent Commission for International Corporate Tax Reform (ICRICT) and a former member of the European Parliament, where she was vice-chair of the Commission of Inquiry into Money Laundering, Tax Evasion and Fraud