Corporate tax

Can a corporate minimum tax fight climate change?

7 min read

13 Oct 2021

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Bob Clowrey

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123RF

7 min read

13 Oct 2021

Text:

Bob Clowrey

Photo:

123RF

The joint communique from the most recent G7 summit included a proposal for a global tax on corporations as part of its environmental measures. Experts say the move could have an impact on the climate – but it depends on how revenues are distributed and spent.

At the end of the most recent G7 summit in June, in Carbis Bay, UK, the leaders of the world’s biggest democracies released a communique that they hailed as a landmark in the global response to climate change. Announcing plans to revitalise the economy in a climate-positive way after the Covid-19 pandemic, the communique set out a raft of environmental measures, including plans to put more electric cars on the road and wind-down polluting gas-powered engines as part of a ‘nature compact’ to protect biodiversity. Leaders promised to spark a green revolution that would protect the planet by creating green jobs. In addition, the communique pledges to cut carbon emissions and doubles down on the Paris Agreement goal of limiting the rise in global temperature to 1.5 degrees.

The communique states: “We commit to [carbon] net-zero no later than 2050, halving our collective emissions over the two decades to 2030, increasing and improving climate finance to 2025; and to conserve or protect at least 30 per cent of our land and oceans by 2030. We acknowledge our duty to safeguard the planet for future generations.”

The communique lists a host of practical steps to help achieve these aims. Leaders said they would work to achieve decarbonised power in the 2030s by phasing out coal power generation and pledged to tip the balance of car buying in favour of electric and hybrid vehicles. They also promised to spend a collective USD 1bn on helping developing nations to cut their own carbon emissions, although the details of the individual financial commitments of G7 members are not yet clear.

One of the most notable announcements, however, was a plan to introduce a global minimum corporate tax rate of at least 15% on large multinational enterprises (MNEs) that would apply regardless of their country of residence. Under the proposal, countries would apply a top-up tax to MNE profits attributed to countries where they are taxed at below the agreed minimum effective tax rate. The goal of the proposal is to stop tax avoidance by large MNEs and put an end to a ‘race to the bottom’ on corporate tax, as tax havens compete to attract big business to their shores. Such schemes are said to cost governments an estimated USD 500-600bn in lost tax revenue every year.

A way to combat climate change?

A minimum global corporation tax could put desperately needed spending power for climate action into the purses of poorer countries. With more money, developing countries could pay more of their share towards the USD 1.5-2tn annual cost of creating a zero-carbon global economy over the next 30 years, which is equivalent to 1.5 to 2% of global GDP. Extra revenue could also help poorer nations to fund their own decarbonisation projects, such as switching from fossil fuels to renewable energy sources and creating green jobs.

Sol Picciotto, senior fellow at the International Centre for Tax and Development, is sceptical that the tax could produce such an impact, however. “There will be little or no additional tax revenue for poorer countries from this deal. Pillar one will affect only 100 of the largest MNEs and will allow only a small amount of their income to be taxed by countries where they have sales, through arrangements which will largely exclude poor countries. It will otherwise leave untouched the existing ineffective international tax rules, which poor countries (in particular) find difficult to apply,” Picciotto says. “Pillar two – the global minimum tax – is designed to give priority to the home countries of MNEs in applying the global minimum tax on undertaxed profits. Poor countries, which are generally only hosts for MNEs, may be given rights to apply a withholding tax to some payments but at rates which are lower than the maximum rates in existing treatiesfor such payments.” 

Picciotto adds that any positive climatic impact of the tax would require the EU and US to lead by example. In doing so they could pave the way for more robust action in the future by demonstrating the viability of environmental reform to other nations. They must also work to ensure revenues reach poorer countries.  

“The global minimum tax may help to shift future negotiations towards more effective reforms, but only if the US and the EU succeed in enacting a strong version of it,” Picciotto says. “How the minimum tax is implemented by the US and the EU will be crucial, and both are politically fraught. Both will need strong civil society pressures.The goal should be to reform international tax rules to ensure that MNEs are taxed by allocating their global income using factors that reflect their real activities in each country - employees, sales, and physical assets.

No obligation to use revenues for climate action

Paul Ekins, Director of the UCL Institute for Sustainable Resources at University College London, says it is fair that companies should pay tax in the countries where they operate. However, Ekins warns that rich nations with more economic activity stand to gain the most from the 15% tax.

“This may or may not be deemed ‘fair’ overall,” he adds. “The tax in itself will do nothing for the climate - in contrast, for example, to a carbon tax - which would directly impact on fossil fuel use.” 

Ekins also points out that developing nations are under no obligation to spend tax revenues on decarbonisation efforts.

“Of course, some countries may use some of the extra revenues for climate action, but also they may not. It is the use of the revenues that will determine whether it has a positive climate impact or not.”