153. Multilateral tax cooperation gets one step closer

Episode Summary

Executive Summary: The episode explains how today’s international corporate tax system emerged from a century-old compromise and why it is now under pressure from profit shifting and tax competition. It details the OECD/G7 effort to create two reforms: reallocating some taxing rights to market countries and imposing a global minimum tax of at least 15%, while highlighting unresolved political, technical, and distributional disputes.

Main Topics: Origins of the international tax system (Priority: 5/5): The podcast traces current rules to League of Nations efforts after World War I, when countries sought to avoid double taxation to encourage cross-border investment and rebuild economies. How multinational profits are taxed today (Priority: 5/5): Current rules split taxing rights mainly between source and residence countries, rely on a physical presence threshold, and use transfer pricing plus the arm’s-length principle to allocate profits among affiliates. Profit shifting and tax havens (Priority: 5/5): Experts explain how multinationals exploit transfer pricing, intragroup borrowing, risk allocation, and especially the location of intangible assets to move taxable profits into low-tax jurisdictions. OECD/G7 reform process and Pillar 1 (Priority: 4/5): Pillar 1 would reallocate some taxing rights to market jurisdictions for the largest and most profitable firms, but it remains politically fragile and technically complex, with low expected revenue. OECD/G7 reform process and Pillar 2 (Priority: 5/5): Pillar 2 proposes a global minimum corporate tax, now backed by the G7 at at least 15%, aiming to reduce the incentive for tax competition and profit shifting. Developing-country concerns and sovereignty (Priority: 4/5): Speakers stress that poorer countries worry about complexity, weak revenue gains, loss of investment-policy flexibility, and being disadvantaged in dispute resolution and threshold design. Political feasibility and future uncertainty (Priority: 4/5): Even if a high-level deal is reached, implementation will be slow and uneven, and major countries like the U.S. may still face domestic ratification and enforcement challenges.

Key Arguments: The international tax system was built to prevent double taxation, not to handle modern multinationals or intangible-heavy firms, so its century-old design is now badly misaligned with economic reality. The existing source/residence balance lets companies shift paper profits to tax havens far more easily than moving real capital or production. Transfer pricing and the arm’s-length principle are manipulable because affiliates are treated as separate entities even when they are part of one firm. Intangible assets are the biggest weakness in the system because brands, algorithms, and intellectual property can be booked in low-tax jurisdictions with little physical constraint. A minimum tax could blunt tax competition by making it pointless to book profits in zero-tax places, because home countries would collect the difference. Pillar 1 is conceptually important but may raise limited revenue and is burdened by difficult definitions, exclusions, and disputes over which countries lose taxing rights. Developing countries argue that the reforms should not be so complex or narrow that they mainly benefit rich residence countries and large multinationals. Even a successful agreement may not eliminate unilateral action, especially if countries continue to use digital services taxes or if implementation stalls domestically.

Data Points: Number of countries in talks: More than 130; later described as 139 countries - Countries participating in OECD-inclusive framework negotiations on global tax reform G7 minimum tax proposal: At least 15% - G7 finance ministers agreed on this as a floor for a deal Historical average headline corporate tax rate: 49% in 1985 - Illustrates the long-run decline in corporate tax rates Historical average headline corporate tax rate: 24% in 2018 - Shows the extent of the race to the bottom Estimated global profit shifting: About $700 billion per year - Gabriel Zucman’s estimate of paper profits shifted to tax havens Share of profits shifted: Almost 40% of profits reported outside a multinational’s country of residence - From the paper cited, 'The Missing Profits of Nations' Revenue impact of profit shifting: Corporate tax receipts reduced by 4% to 10% - OECD estimate of lost receipts from legal profit shifting Dollar value of lost receipts: $100 billion to $240 billion - OECD estimate corresponding to the 4% to 10% range Revenue effect of Pillar 1: $5 billion to $12 billion - OECD impact assessment for the first pillar Revenue effect of Pillar 2: Corporate tax revenues up by 2.7% - OECD estimate of the minimum tax’s effect, excluding the U.S. Revenue threshold for Pillar 2 scope: €750 million - Main proposal for companies subject to the minimum tax Revenue threshold discussed for Pillar 1: €20 billion - Indicative threshold for the largest firms in the reallocation proposal Routine profit share in Pillar 1 proposal: 10% profitability rate - Illustrative baseline amount taxed under current rules before reallocation Residual profit share to reallocate: 20% of excess profits - Dominant proposal described in the episode Google Bermuda royalty revenue: Almost $20 billion in 2019 - Example of profits shifted via location of intangibles U.S. multinationals’ share of shifted profits: About 50% - Zucman’s estimate of who shifts profits globally EU multinationals’ share of shifted profits: About 25% to 30% - Zucman’s estimate of who shifts profits globally Example of price manipulation: Apple Ireland exports iPhones to Apple Germany - Used to illustrate transfer pricing incentives

Pivotal Quotes: "the main problem with the current system of international taxation is that there is widespread profit shifting by multinational companies to tax havens." — Gabriel Zucman: Explaining why the existing system is failing "the League just went with what already existed." — Sunita Jogarajan: Describing how the original international tax rules preserved the status quo "the current form of globalization is characterized by tax competition, a very negative form of international competition that benefits only a few actors in the economy." — Gabriel Zucman: Arguing for a global minimum tax

Implications: The talks could reshape where multinational profits are taxed, weaken tax havens, and raise revenue, but only if countries agree on details and implement them consistently. If not, unilateral digital taxes and renewed tax competition may persist.