A global minimum corporate tax is a boost for global governance and for a carbon tax

Global governance received a boost from G7 leaders in 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 an overall minimum corporate tax that multinational companies must pay in the jurisdictions where they operate. It was developed in record time under the tutelage of the Biden administration and will be deployed from 2023.

The question is: can the GMCT serve as a model of global economic governance, where developed and developing countries come together in a spirit of cooperation? Such a spirit has been desperately absent since the pandemic, with the G7 and G20 scrambling over vaccine supplies and economic aid to Africa. On the fiscal front, Europe has shown its impatience by applying in its own way a tax on digital services, which has aroused the ire of the Trump and Biden administrations. The digital tax has now stalled as negotiators craft a global tax modeled on GMCT.

What makes the GMCT a particularly attractive model is both its simplicity and its complexity. It is simple and easy to understand as it requires the corporate sector to be a responsible taxpayer in the jurisdictions in which they operate. on their business activity in a country, whether or not they have a physical presence. While Pillar 1 primarily targets the activities of large US tech companies (although it has wider applicability), Pillar 2 is more comprehensive by introducing the principle of a minimum effective tax rate that works as a complement. when income is taxed below GMCT. .

Corporate taxation is, of course, marked by complexity and opacity, which the GMCT is trying to remedy, but there will inevitably be gray areas that will allow the tax arbitration practices of the past. One of those gray areas cited by experts is the generous tax incentives to invest in machinery provided by developing countries to attract and retain foreign investment. Under the new rules, these incentives will be exempt, a major victory for developing countries like China and India.

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

Despite the potential problems with implementing GMCT, its design could be emulated for the introduction of similar levies elsewhere. A deal on a global carbon tax might incorporate GMCT principles with a twist – pay where you pollute – but getting there would require a shared global deal on carbon pricing. The The IMF recently estimated that globally, additional measures equivalent to a carbon price of $ 75 per tonne or more are needed by 2030, which in effect would set a global floor like the GMCT.

The The European Union threatens adopt a unilateral approach by proposing to introduce a carbon border adjustment mechanism (CBAM), which, at its heart, would impose a high tariff on imports of selected products from countries deemed less ambitious in the pursuit of climate objectives global. CBAM may well be an attempt by the EU to force America (which has already cast cold water on the proposal) and other countries into a global deal on a global minimum carbon tax.

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

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