The Covid-19 pandemic cost countries a lot of money that was spent on facing health challenges and on facing economic challenges that resulted from the crisis. The pandemic also urged countries to reach an international agreement in July 2021 that imposes a minimum tax (at least 15%) on multi-national corporations . The agreement that was approved by 132 countries will come into effect in 2023.
The goals that the international tax agreement is supposed to achieve are the following:
1. Putting an end to 'the race to the bottom': 'The race to the bottom' is the practice of lowering taxes in order to attract corporations. Ireland is one of the countries that resort to such practice.
2. Stopping profit shifting: The agreement also aims at putting an end to profit shifting, to which many multi-national corporations resort, in order to evade taxes, as it helps lower income tax on these corporations. The agreement helps make sure that a given corporation does not pay less than it must, wherever it is. The ultimate goal is to redistribute the returns of the corporate tax of about 100 multi-national corporations, whose earnings amount to more than 20 billion dollars.
3. Targeting technology corporations: The agreement focuses on the multi-national corporations that have branches and offices all over the world and which make huge profits, in addition to the corporations that have the ability to develop advanced networks that help them evade proper taxation. This particularly applies to huge tech corporations, such as Google, Amazon, Facebook and Apple. According to OECD's Center for Tax Policy and Administration, the agreement will later apply to more than 100 global corporations, representing 50% of global GDP.
The advantages of the agreement
The countries that joined the agreement will enjoy the following advantages:
1. Tax revenue will increase: According to a non-governmental organization called Tax Justice Network, tax evasion all over the world costs governments about 427 billion dollars, and this money often goes to tax havens or countries that do not have strict tax regimes. The organization emphasizes that the losses that European countries suffer because of such practices amount to 184 billion dollars a year. According to OECD, the increase in tax revenue in the light of the new international agreement is estimated to be about 150 billion dollars a year.
2. Tax burden will be fairly distributed : The agreement is expected to guarantee the countries that join it fair distribution of the right of imposing taxes on the profits of multi-national corporations. It also constitutes 'the foundation stone for reforming the international tax system'. According to OECD's Center for Tax Policy and Administration, the agreement will change the way of imposing taxes on international corporations, putting an end to arbitrary tax competition by forcing countries to stick to the minimum of taxes approved by the agreement (at least 15%), and by making sure that the profits of large corporations (especially tech corporations) are fairly distributed. It is noteworthy that the minimum global tax will apply to less than ten thousand large corporations whose earnings are more than 750 million euros a year.
3. Investments will leave tax havens: The agreement is expected to have a significant effect on the countries that impose very low tax rate, or no taxes at all, on large multi-national corporations. Accordingly, these corporations are expected to leave these countries, which will- as a result- lose the advantage it has over other countries-namely, tax competition. This will reduce the tax revenue of such countries and limit their chances of attracting foreign investment as well as foreign capital flows, which will ultimately negatively affect growth rates (This is known as the negative impact scenario).
Criticism and legitimate apprehension
The agreement was supported by some countries and entities, and OECD expects it to annually add about 150 billion dollars to global tax revenue. However, some experts criticized and even cast doubt on the effectiveness of the agreement. Following is a summary of the main criticisms:
1. The minimum tax on corporations is too small: Some economic experts believe that the minimum that the agreement approved, which is 15%, is too small. They explained that the average rate of income tax on corporations worldwide is 22% (and it even was 50% in 1985).
2. Tax havens will not join the agreement: According to OECD, the countries which impose less tax on corporations than what is approved in the agreement did not join the agreement in the first place. These countries include Bulgaria, Ireland and Hungary, where the tax on corporations is 10%, 12.5% and 9% respectively.
Anyways, we can say that the agreement will be advantageous to some countries, but less advantageous to other countries. On the one hand, it will allow some countries to benefit more from tax revenue. On the other hand, we still do not know much about its implications for the global financial system, and on the distribution of investment all over the world; the godfathers of the agreement emphasize that it will put an end to the so-called international 'tax havens'.
Limited effects on UAE
The agreement is generally expected to have minimal negative effects on UAE, because of the following:
1. UAE is an investment-friendly environment: According to OECD, increasing tax rates in countries that impose low taxes, such as the Gulf countries, will not repel foreign capital. On the contrary, it may lead large multi-national corporations to settle in the region, to benefit from the competitive advantages and the easy administrative procedures that the region's countries provide, especially if these countries lower other taxes, and pass laws and approve procedures that promote and enhance competitiveness.
2. UAE has an advantage over neighbouring countries:
UAE is expected to have an advantage over other Gulf countries when it comes to competition and potential. UAE always seeks to create a work environment that encourages and promotes competition. In this respect, many important procedures have been taken lately, such as allowing foreigners to own 100% of a company shares without having to have a local partner, and allowing 100% capital and profit transfer. Besides, UAE sets no minimum for capital investment.
Data from the Ministry of Finance show that the rise in the revenues in the federal budget in the end of the third quarter of 2020 came from 'other revenues', which include taxes, social contributions, etc. The budget item 'other revenues' actually represented 88.5% of the total revenues. This shows that these 'other revenues' in the federal budget are particularly important, notably the taxes.
3. UAE's economy is essentially competitive: As a result, the competitiveness of the UAE has greatly improved. In 2020, UAE was one of the top ten countries on 28 indexes of competitiveness in the sector of finance and taxes. The financial policy that UAE follows is characterized by flexibility and variety, and this enhances economic growth and the readiness of UAE's economy to face the circumstances imposed on the world because of the Coronavirus crisis. The need for a more flexible sustainable growth led the UAE to adopt an economic approach that highly capitalizes upon sustainability of development.
