Draining Our Pockets: How the global tax cartel could cost Britons billions

The Adam Smith Institute’s latest paper, written by Julian Morris, outlines how the global minimum tax proposal would endanger Britain’s national interest:

• One-hundred and thirty six jurisdictions, including the United Kingdom, have agreed to negotiate two new treaties that would, if implemented, change how many large companies are taxed in the name of ‘tax fairness’.

• Pillar One would implement a special tax on profits above 10% for companies with an annual revenue of over €20 billion, thus changing the recipient country for some of the taxes on profits of the world’s largest multinational companies. 

  • Pillar One was originally targeted at digital companies, however in the final design it will apply to all companies except regulated financial service companies.

• Pillar Two would introduce a global minimum tax of 15% on multinational companies with annual revenues of over €750 million.

  • The main purpose is to prevent jurisdictions from competing with one another by offering lower taxes in order to attract companies.

  • The measure is designed to require companies to pay a minimum level of corporate income tax where they domicile, to be achieved through companies paying “top up” amounts. This is contradictory with Pillar One which aims to require companies to pay tax where they operate.

• The minimum tax has been justified by claims that there is a ‘race to the bottom’ in tax rates.  But, in fact, corporate tax revenues, as a proportion of GDP, have risen in recent decades along with lower rates. This includes in the UK where corporate tax revenues rose from about 2% of GDP in 2000 to over 2.5% in 2019, at the same time as the topline rate was reduced from 30% to 19%.

• Corporate taxes are the most harmful of major taxes to economic growth because they significantly reduce investment and entrepreneurial activity. The minimum tax would lock in a corporate tax rate, which economic theory suggests should be lower if not closer to zero.

• There is no guarantee that every country will implement a global minimum tax, including the United States if President Biden is unable to get Pillar Two through Congress. This would create advantages for some countries.

• The minimum global tax could be seriously detrimental to the United Kingdom because it would:

  • be incompatible with key UK Government policies, including the super-deduction, free ports and the patent box; 

  • undermine national sovereignty by locking the UK into a model of corporate taxes and reduce future policy flexibility; and 

  • result in some UK companies relocating to jurisdictions that do not implement the minimum tax, leading to the loss of as much as £7 billion in annual tax revenues to HM Treasury.

• If the UK Government and OECD do not abandon the process but want to reduce the negative impact of the treaties, the following changes could be implemented:

  • 1. Set the global minimum effective tax rate in proportion to the current global average effective tax rate, and at a lower rate, such as 10% rather than 15%;

  • 2. Permit full expensing of capital in the global minimum tax rate to enable ‘super-deduction’ and freeports;

  • 3. Calculate the minimum tax at an entity level (‘global blending’ in OECD-speak) rather than at each jurisdiction; and

  • 4. Expand the definition of an excluded fund to cover all regulated entities such as private equity funds, insurance company funds, and unregulated (private) funds.