The finance chiefs of the G20, representing the world’s largest economies, have signed off on a deal crafted with the aim of preventing multinational companies shifting profits to low-tax havens.
Under the agreement, there will be a global minimum tax of 15 percent on corporations. New rules will be developed so that large corporations, including tech giants such as Amazon and Google, will pay taxes in the countries where they obtain revenue, even if they have no physical presence there.
The deal was endorsed at the meeting of G20 finance ministers and central bankers held in Venice over the weekend. Whether it is enacted remains to be seen. There are still several lower-tax countries that have refused to sign, including European Union members, Ireland and Hungary.
Their support is necessary, in order to secure the deal’s endorsement by the EU, where a unanimous vote is required. Speaking after the agreement was reached, US Treasury Secretary Janet Yellen indicated maximum pressure would be applied and the holdouts would be “encouraged” to sign on before the deal goes for final ratification, at a meeting of G20 leaders in October.
Even if they did not, other measures could be used. She said that agreement contained “the kind of enforcement mechanism” that holdout countries would not be able to undermine.
Yellen and the Biden administration have their own problems in getting US endorsement. The tax deal comes in two parts, designated as pillars. Pillar one, which is promoted by the European powers, allows for greater taxation of multinational companies. Pillar 2, which has been promoted by the US, sets the global minimum corporate tax rate at 15 percent.
The two parts of the deal are interconnected. Endorsement of Pillar 1 in the US may need changes to existing treaties, requiring a two-thirds vote in the Senate, which is divided 50-50 between Republicans and Democrats. If Pillar 1 falls through, then all bets are off, and the European powers go ahead with their imposition of digital taxes on the large US tech giants. If this were to take place, it would mean a return to the kind of confrontation that occurred during the Trump administration, which the tax agreement is aimed at avoiding.
Even if the deal is implemented, it will not bring a major boost in tax revenue, as experience has shown that major corporations are certain to devise new avoidance mechanisms.
The tax deal was the central focus of the meeting, with the key issues of an increased COVID-19 vaccine rollout and the related question of debt relief for poorer countries all but ignored.
The meeting’s communiqué contained boilerplate phrases such as “we remain determined to bring the pandemic under control everywhere as soon as possible” and declared support for efforts to accelerate the delivery of vaccines. But no money was allocated or specific proposals made to achieve these objectives.
In the lead up to the meeting, IMF managing director Kristalina Georgieva warned of a “worsening two-track recovery,” driven in part by differences in vaccine availability. She called for “urgent action” by G20 leaders and policymakers in this “critical moment.”
It was not forthcoming, either on the vaccine issue or on the worsening debt position of many poorer nations, as a result of the deep economic and financial problems resulting from the pandemic.
Last week a Washington Post article by David Lynch pointed to the significant increase in indebtedness, as countries in Asia, Latin American and Africa stepped up their borrowings.
The result is that emerging market borrowing, at the end of March, totalled $86 trillion, up by $11 trillion during the pandemic. So far, the flow of money to emerging markets has been sustained, because their debts offer better rates of return than in the US, due to the ultra-low interest rate regime maintained by the Fed.
However, according to the article, if monetary conditions tighten in the US faster than expected, it could trigger a “bout of capital flight that could shake both emerging market borrowers and the US economy.”
As much of emerging market debt is denominated in US dollars, these countries would be faced with either raising interest rates to try to stop the capital outflow, likely bringing about a recession in their economies, or letting the value of their currencies slide, thereby increasing the cost in local currency of repaying dollar-denominated loans.
Last year a debt service suspension initiative (DSSI), implemented by the G20, saved 43 poorer countries some $5.7 billion, a level described by World Bank chief economist Carmen Reinhart as “disappointing.” The total servicing costs for developing countries this year are expected to be $1.1 trillion.
Agustin Carstens, general manager of the Bank for International Settlements, sometimes described as the bank for central banks, has warned that developing countries are close to exhausting their capacity to borrow.
In an interview with the Financial Times last week, he said: “They have to start facing the music of how to get growth going [with] all these things working against them ... reduced fiscal space, they don’t have monetary space, they have higher corporate debt and higher sovereign debt.”
Carstens pointed to a significant change in the growth pattern of the global economy, as a result of the pandemic.
“This is the first time in the world that advanced economies’ growth is above global growth, and global growth is above emerging market growth,” he told the FT. “Growth in emerging markets has been slowing down, and we don’t see it picking up.”
Carstens said that so far, emerging markets had been able to get through the pandemic without a crisis, but there was still a substantial risk of one. “Some of us think that this may not be the final picture, and that what we have seen so far is too good to be true.”
But the warnings from both the World Bank and the BIS were largely ignored. No new initiatives were announced on debt relief and debt restructuring, with the G20 communiqué declaring that the G20 welcomed the “progress” under DSSI, widely regarded as inadequate. It also declared support for the proposal by the International Monetary Fund to expand Special Drawing Rights (SDRs), which enable countries to boost their foreign currency reserves, by an amount equivalent to $650 billion.
This measure has also been criticised as inadequate, because SDRs are available in proportion to a country’s size within the IMF, meaning that poorer countries in most need of additional currency reserves would get the least.