G7 Finance Ministers didn’t hold back on fanfare after reaching last week’s agreement on global tax reform. US Treasury Secretary lauded the deal as “historic”, while her German counterpart Olaf Scholz called it "very good news for tax justice.” UK Chancellor Rishi Sunak declared the creation of an international tax system "fit for the global digital age."
We should allow these leaders a degree of triumphalism. International tax reform is fraught with difficulties and this agreement – years in the making – is a clear step in the right direction. It’s not perfect, but we should not allow the best to be the enemy of the good and the ministerial communiqué does leave open the door to greater levels of ambition. Market countries will be allocated taxing rights on “at least” 20% of profit exceeding a 10% margin, while the global minimum tax will be “at least” 15%. These are signals that the deal struck can be a baseline, not the extent of ambition.
The coming months bring opportunities to raise the bar further, which is why business leaders must find our voice. Quite rightly, global tax policy is not made by the G7 and a meeting of G20 finance ministers in July will be key, as well as technical talks amongst +130 countries at the OECD. Don’t underestimate the difference it can make if these politicians and their officials come to the table knowing a growing number of business leaders want them to be bold.
Of course, short-termist, shareholder-obsessed firms will continue to lobby for opaque, loophole-riddled international tax rules, which they can game to suppress their bills. Think of them as invisible devils on finance ministers’ shoulders, threatening that international compromises will hurt national corporate tax bases. By contrast, courageous CEOs can provide a more enlightened counsel, promising to back an international agreement that is fair and levels the playing field for all.
I won’t repeat here all of the reasons why this is in business’ clear interests, but they are many. Encouragingly, a growing number of CEOs see that healthy tax bases are a prerequisite for healthy societies in which their companies can thrive, not least as we seek to rebuild our economies after Covid. And companies seen to pay their fair share will be rewarded by their millennial and Gen Z workforces, plus customers and other stakeholders too.
To be credible and secure public support, the deal cannot be simply a diplomatic achievement, it has to raise significant revenues and defy exploitation. A 15% minimum corporate tax rate is a start, but there is genuine support for 21% and we need a mechanism by which the level can be ratchetted up. Big tech companies such as Amazon cannot be let off the hook by exempting companies with profit of less than a 10% margin from making a contribution in those countries in which they operate. And the deal must benefit developing countries, which are relatively much more dependent on corporate tax revenues; capacity building and corporate ownership transparency would also help the poorest nations to collect a fair share of tax.
The direction of travel feels increasingly set. Not only have the United States and Europe put aside their differences to agree on multilateral tax reform, but the EU will soon mandate country-level tax transparency from corporates, whilst legislation in the United States Congress aims to do the same. By the COP26 Summit in November I hope that the IFRS Foundation will have achieved its vision of a new Sustainability Standards Board, with a mandate to establish a global ESG reporting framework for businesses. All of this greater transparency helps push toward a private sector more accountable for its impact on the world.
Wise CEOs already get it. More are adopting their own responsible tax principles and the boldest will see the opportunity to elevate from getting their own houses in order to helping transform the international tax landscape. Forget greenwash and CSR, these business leaders are the real systems transformers. Their companies and our societies could benefit massively if they use this moment to make themselves heard.