Matt Kilcoyne is Head Of Communications at the Adam Smith Institute.
In a statement immediately following his meeting with Finance Ministers from the G7, Rishi Sunak said an introduction of minimum corporate tax rates will “finally bring our global tax system into the 21st Century.”
It’s a curious phrase. We don’t operate a global tax system. There isn’t one, we operate national governments, and sovereign states set tax rates within their borders. A quarter of a millennium ago the Americans famously broke from Britain to make the point that you can’t set the tax policy of others without their consent, and just five years ago the British decided that the prospect of sharing tax policy and ever closer union with the Continent was to be taken off the cards. And yet, seemingly, that has just changed.
A decade-long debate by the world’s most powerful western countries has broken through to set the terms of taxation that will see competition between states diminish. The reform to force corporations to book their tax in the places where they take revenues is seen as an immediately popular policy.
It is intuitive to people that if you’re selling a good in Britain, you have to book the sale in Britain and tax be levied in full here.
Yet little thought is given to what got the good to you buying it in the first place: the investments, the logistics, the marketing, the IP, the trade, the staff, the pensions and various insurances. Booking activity and cross-subsidising operations across jurisdiction has led to us having the greatest living standards and the greatest variety of choice in human history.
The cost of thinking simply and trying to straightjacket every company into operating as global finance ministries desire will be borne by the likes of you and me through higher prices, and via lower choice as firms decide to shift operations and cut operations.
It is one thing to say something out loud and another to implement it. Any changes to our legal system will require Parliamentary consent, anything that could even possibly represent a powergrab over devolved laws will undoubtedly see resistance from Sturgeon and Drakeford.
A policy being announced as a fait accompli on a sunny Saturday afternoon via social media does somewhat undermine the convention that Parliament hears its matters first. While the Treasury’s usual response to those inquiring about their works is to say that “tax matters are for the Chancellor,” Sunak may find that backbenchers remind him that tax matters are actually for them.
And of course the Crown Dependencies and Overseas Territories that have just seen, without so much as a by-your-leave from UK Central Government, their independent fiscal policies smashed to pieces. Our Caribbean states help drive the global system of trade. They’re not just brass plates, ask The Guardian about the benefit of being able to move investment offshore to ensure the continuation of the free press.
That’s just the internal battles. The G7 is a bit of a misnomer, because it includes the largest seven free world nation states (the USA, UK, Japan, Canada, France, Germany, and Italy) but also the EU as a whole. It is unclear if the EU can sign up its members to a new tax reality when fiscal powers are explicitly reserved by its member states.
Ireland has come out already to say that they expect to lose around 20 per cent of their corporate tax revenues under the reforms agreed at the G7 — about €2.2 billion. With Sinn Fein on the rise in the South and desperate to secure largest party status in the North, despite their historic left-wing positions, we await to see how they will respond to this curtailment of Irish sovereignty and prosperity.
When Estonia was acceding to the bloc in 2002 Mr Vahur Kraft, Governor of the Bank of Estonia, said:
“In my view it is obvious that as long as the European Union remains to be the alliance of independent member states, there will be neither need nor possibility for any additional communitisation.”
Either the alliance is transformed without treaty to the status effective of a nation state or the Council President Charles Michel and Commission President Ursula von der Leyen have spoken without authority. Whether they have the power to force the issue is very much questionable. Can the bloc carry the likes of Ireland and Cyprus and Hungary while sticking two fingers up to the model on which they’ve built their economy in recent decades?
The UK itself of course already has a corporate tax rate above 15 per cent, and the Chancellor presumably sees little threat in letting our competitors agree to raise those under their thumb to that level (including our nearest and of course dearest neighbours Ireland) to give him a bit more room to raise our own rate back to 25 per cent by April 2023. But that might not always be the case and why should a Conservative want to create a ratchet effect that only ends up with higher tax rates?
The crux of the matter for all cartels is what mechanism keeps them all pulling in the same direction. Finance Ministers have the dual responsibility and joy of having to maximise the revenue that they take from their citizens to finance the projects that their fellow politicians push, but also for promoting and inducing economic growth.
While all the stars have aligned and G7 Ministers managed to agree for once to work together to extract a little bit of extra tax revenue from the likes of Facebook, Google and Amazon the consensus is unlikely to hold between states that are friendly but highly competitive.
When it is to be implemented too is debatable. The Treasury insists it’s after the issues of superdeductability have passed and so our investment strategy is sound, but the tax cartel has to hold for a long time to work. Consensus requires trust and that’s short between Britain and the EU, it was non-existent between Trump and the EU. There’s little to say it will be there with the next occupant of the White House.
Chris Giles, Economics Editor at the FT, recalls a G20 meeting where a deal restricting profit shifting was announced. He asked them to commit to a date he voiced for full implementation. Only the Chinese Finance Minister half raised a hand to agree to it, realised he was alone and dropped it. The idea is back at a smaller scale. Which tells you that it failed once to get traction with more competitive partners, partners that are on the rise and which will be eyeing up business that is looking at less onerous markets elsewhere. But also that it’s taken a decade to get to this point suggests it’s weak in its current form too.
The mood of Sunak’s announcement was upbeat but the tune we are asked to dance to is miserable. The West’s states are closing ranks against the private sector that is the cornerstone of our prosperity just as we need it most to build back better after the pandemic.