Excellencies,

Eight years ago, you mandated the OECD to address corporate tax avoidance by multinationals, which cost countries at least $240 billion a year in lost fiscal revenues. After years of negotiations including 140 countries, the agreement announced last Friday shows that it is finally possible to change a system that was built one hundred years ago. The agreement recognises the basic principle of the need for a global minimum tax to put an end to the tax havens business model. With a global minimum tax, it doesn’t matter in which countries multinationals record their profits, as these will be taxed at least at the minimum rate.

The agreement also finally recognises the principle that multinationals are unitary businesses, operating across jurisdictions and that their worldwide profits should be taxed in line with their real activities in each country on a formulaic basis, according to the key factors that generate profit (e.g., employment, sales, and assets) and so that multinationals can no longer pick and choose where to record their profits.

However, this reform process has been watered down in such a way that it will overwhelmingly benefit rich countries.

Proposals for a global effective minimum tax of 21% (or even better 25%, as we advocate) have been rejected in the pursuit of the lowest common denominator of 15%, a success for Ireland, a loss for the rest of the world.

A reform that could have delivered more than $200bn in increased fiscal revenues worldwide with a 21% tax rate, will deliver only $100bn with a 15% tax rate. By giving priority to apply the minimum tax to the countries where the headquarters of multinationals are located, the lion’s share of the additional revenue is expected to be received by a small number of rich countries. This leaves aside the application of the principle of fairness you agreed, that corporations should be taxed in the jurisdictions where their profits are generated.

There are legitimate concerns that such a low global minimum will turn out to be the global standard, and a reform that was intended to make sure multinationals pay their fair share will end up doing just the opposite. Developing countries, which rely relatively more on corporate tax income as a source of government revenues, and suffer the highest losses from corporate tax abuse as a share of their current tax revenues, would be big losers. So too would small and medium-sized enterprises in developed countries, which will still pay the full local rate.

Particularly problematic is the proposal intended to address taxing rights, but which will apply to only the 100 largest and most profitable global multinationals and reallocate only a small fraction of their profits. The demand for a commitment from countries to withdraw or refrain from introducing measures to ensure that digital multinationals not covered by the current agreement pay taxes is simply unfair.

Concrete proposals put forward by developing and emerging countries, including some G20 members, to ensure all companies pay taxes in the countries where economic activities take place, and to allow source countries to apply the minimum tax on payment of services and capital gains (the so called “Subject to Tax Rule”), which are used by multinationals to shift profits out of their countries and into tax havens, have been ignored. Repeated concerns with respect to new rules for mandatory dispute resolution have also been given short shrift.

The negotiations are happening in the aftermath of COVID 19, at a time when developed countries are recovering faster than developing countries, who lack adequate fiscal space. Exacerbating this divergence by failing to provide sufficient revenues to sustain economic growth in developing countries is economically foolish. To do so during a global pandemic, when the need for revenue to support public health and economic recovery is greater than ever, is also socially inequitable. Coming on the heels of vaccine nationalism and hoarding by the advanced countries, this agreement is hardly one that enhances global solidarity. Moreover, it goes against global commitments grounded in the United Nations Charter, including those related to human rights and the Sustainable Development Goals, particularly Goal 10 on reducing inequalities within and among countries.

Overall, the current agreement is not grounded on a proper understanding of the economics of corporate profit taxation and reinforces global inequities. From the point of view of developing countries, it can only be seen as an interim solution which they have been forced to live with. In the absence of sustainable solutions, countries should not be restricted from continuing to pursue alternative measures, such as digital services taxes, which are already generating revenue today, or the solution for taxing digital services that has been developed by the United Nations Tax Committee.

The current negotiations must continue during the presidency of Indonesia in 2022 and India in 2023 but in a different format that recognises the failure of the 2019-2021 process to give effective voice to developing countries. This ultimately must provide the platform for a new, more inclusive, round of negotiations to deliver a new global tax deal for the world.

Addressing the complex global challenges that the world is confronted with today, from the adequate provision of public services to the existential climate crisis, requires visionary decisions that put national self-interest aside in the search for the common good. It means siding not with multinationals and tax havens but with citizens both in the Global North and in the Global South. History will judge you harshly if you miss the chance to get this right.