The “historic” tax agreement struck at the Group of Seven summit of powerful nations looks like the beginning of the endgame in a decade of intensive negotiations on global corporate taxation. In the past, governments have claimed that they have a sovereign right to set their own taxes. Now, a global minimum tax, championed by the Biden administration, would for the first time involve a multilateral agreement on the tax rates paid by businesses. A new approach to taxing highly profitable firms will allow countries outside the United States to claw back some tax on digital giants such as Google and Facebook.
However, agreement among powerful nations may not be enough. Lower-income countries now want to have their say in global tax politics.
G-7 agreement is no longer enough
Since the global financial crisis of 2007 through 2009, the G-7 and Organization for Economic Cooperation and Development (OECD) have ceded decision-making to a wider group of countries. At first that was the G-20; more recently, it’s been an “Inclusive Framework” of 139 jurisdictions, including emerging market and lower-income countries. The G-7 and OECD had decided that rules laid down by exclusive clubs of powerful nations were no longer enough, in a world where they wanted all countries to adopt the standards.
As a result, before the G-7 agreement is implemented, the countries of the Inclusive Framework will need to adopt it. In the past, that has not been difficult, as all of the Inclusive Framework participants must comply with “minimum standards” set by the OECD and G-20, and lower-income countries have only marginal influence in negotiations.
But that may not last. As my new book “Imposing Standards: the North-South Politics of Global Tax Politics” explains, lower-income countries have been disadvantaged by the international tax regime for a very long time, unable to participate as equals in negotiations. To understand whether things may be changing, you need to grasp three lessons.
Great powers want to set the rules for everyone else
The first lesson is in the book’s title. In a 1976 memo, a British official explained that rich countries looking for investment opportunities seek bilateral tax agreements with lower-income countries in need of investors, intending to “impose acceptable fiscal standards … in countries … where such standards would otherwise be absent.”
In deciding what’s “acceptable” in corporate taxation, tax professionals and officials from G-7 and OECD countries have dominated. They claim that the OECD’s model tax convention — which sets out a starting point for both government-to-government agreements and multilateral standards — is the best way to tax multinationals. Critics retort that treaties based on this convention restrict weaker countries’ rights to tax foreign multinationals, and lock them into inappropriately complex transfer pricing rules, given their limited administrative resources.
The G-7 deal is no different. It expects participating countries to abandon unilateral taxes on digital services, which they have begun to adopt to make up for inadequate rules designed in the pre-digital era. From the perspective of lower-income countries, the G-7 deal does not resolve those inadequacies, although the pressure to play by the new rules will be intense.
The G-7 wants to mobilize new global financing as an alternative to China’s multilateral push
Technical expertise is essential
The second lesson is that many lower-income countries are disadvantaged in negotiations because of a disconnect between policymakers and their technical experts. In 1970s Zambia, for example, political appointees in the Ministry of Finance and the revenue authority negotiated tax treaties without thinking about how they would diminish government tax revenue. By the 2000s, revenue officials wanted to renegotiate, but could not interest their political principals. Today, this lack of coordination is one of the main obstacles to more effective lobbying by lower-income countries in global tax negotiations.
Lower-income countries are late to the negotiating table
The final lesson is that, over and again, lower-income countries join multilateral negotiations late, after more powerful countries with larger economies have entrenched their first-mover advantage. In formative negotiations at the League of Nations, decisions made in 1925 by the then-great powers were presented as a done deal when new participants from lower-income countries sought to revisit them only two years later. The G-7 agreement will be presented to the Inclusive Framework in the same way. More generally, alternative ideas from lower-income countries are rarely considered seriously by the tax community that maintains the OECD model, unless they can be made compatible with the existing consensus.
Countries have also signed away their bargaining power. In the 1990s, Vietnam rushed into signing bilateral tax treaties with many of its most important trading partners without adequate preparation. As a result, said a former negotiator, “they forced us to use the OECD model.” Many of those badly negotiated treaties still constrain countries’ ability to tax foreign-owned companies today, limiting their options for unilateral action on digital taxation. One former negotiator told me that “African countries have been brainwashed into thinking they need tax treaties,” while another argued they were “a concept put there by OECD countries to help their multinational companies.”
Can lower-income countries escape the trap?
All this suggests that there are three relevant factors determining whether lower-income countries can escape this pattern. The first is whether they question what legal scholar Tsilly Dagan calls the “tax treaties myth.” My research shows how policymakers often think — without evidence — that they must go along with OECD tax standards if they want to attract investment. The second is the strength of their technical experts, who need to be able to develop a critical perspective on OECD standards, knowing their policymakers and politicians will support that position. The final question is whether countries can consolidate Global South-South cooperation, already emerging through the G-24 and African Tax Administration Forum. If these three elements fall into place, as has begun to happen in tax cooperation at the United Nations, the great power monopoly may finally topple.
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Martin Hearson (@martinhearson) is a research fellow at the International Centre for Tax and Development based at the Institute of Development Studies and author of Imposing Standards: the North-South Politics of Global Tax Politics (Cornell University Press, 2021).