Tackling the negotiations to tax the world

The U.S. Treasury recently announced a proposal to tax firms based on their sales in each country and impose a minimum corporate income tax rate at the global level. If a deal is to be struck by the end of summer, time is short and negotiations must be tackled efficiently. In our opinion, as former negotiators in the EU and G-20, the U.S. negotiation team should focus in the next few months on 3 C’s: Calibrating the deal, coordinating stakeholders and communicating clearly to ensure the success of this ambitious plan. 

First, the deal needs calibration. As it stands right now, it is rather vague. The devil is in the details and the stakes are high. In shaping the parameters of the deal, countries can ensure that certain multinationals will be left out of the proposal, retain fiscal leeway, get a share of the corporate tax pie and even benefit from mitigated geopolitical strife.  

The proposal is scarce on details. Countries will try to shape the parameters of the deal to exclude some of their strategic corporations and it is important for the U.S. to throw in some “carrots” for these countries and their multinational firms: e.g. publishing a “white list” of compliers and allocating money to worthwhile projects according to criteria agreed by consensus. A linkage to sustainable development goals (SDGs), for example, could incentivize countries to engage in a humanitarian (and more easier to digest) endeavor, rather than in a simple tax collection exercise.  

The minimum tax level should be wisely chosen to allow some countries to set higher marginal taxes, especially with a sales tax in place. Countries like Ireland are expected to demand a lower minimum tax rate during the negotiations. Less than two months from the launch of the initial scheme, the U.S. is already reducing the proposed global minimum corporate rate from 21 percent to 15 percent. Curtailing the “race to the bottom” should be done at a paced, sequential and sustainable rate. At the same time, the U.S. needs to keep in mind that the current proposal to increase domestic corporate taxes to a rate between 25 and 28 percent might put U.S. firms at a disadvantage, if the gap with the minimum global rate is too broad.  

The “corporate tax pie” will be most likely divided between the U.S. and Europe, and this might make the whole proposal perceived as unfair by the rest of the countries. For negotiation packages to be solid, they have to be perceived as fair and beneficial by all parties. If the countries pledge to use tax money towards SDGs such as climate action, the tax receipts may benefit directly or indirectly countries outside the U.S. and Europe, making this global proposal more equitable.   

The details of the deal need to address tensions over digital taxes and mitigate geopolitical strife. The deal will need to convince countries like Italy, that have already taken matters into their own hands and introduced a digital services tax to curb tax avoidance that may alter domestic policies, and the European Commission, which is pressing ahead with a digital levy. 

Second, coordination will be far from easy as there are important stakeholders of various nature: large corporations, small tax havens, world powers and political forces in the U.S.  

Large corporations might be (rightfully so) concerned about knocking profits, stock market response, effects on corporate location and even supply chains.  Large and profitable flagship tech companies, like Microsoft or Apple, will be foreseeably among the hardest hit. The U.S. has historically warned in G-20 tax negotiations to be careful not to kill the goose that lays the golden eggs. The U.S. must follow its own advice! 

Tax havens, or “investment hubs”, will be hit and risk losing tax revenues as some companies relocate. Ireland, the Netherlands, Hong Kong, Bermuda and Singapore are unlikely to be happy with a minimum tax rate and a sales tax.  

World powers may object to the proposal because a deal would bolster U.S. influence as a global player. Should the U.S. succeed, and overcome the numerous stumbling blocks, it will reaffirm its “soft power,” and underpin its capacity to translate its priorities into other players’ objectives. The proposal is an eloquent statement and clearly marks the return of the U.S. as a major actor committed to the multilateral rules-based system, in contrast to the previous U.S. administration that was focused on curtailing the system. The U.S., in its role as leader of the free world, intends to fully exercise the power to define the rules on which the system is based, countering China’s unconcealed intention to define a global system with Chinese characteristics. 

This bold move will certainly meet resistance from other world powers and jeopardize the negotiations. Coordination with the EU and within the G-7 is paramount.

Moreover, in diplomatic negotiations, frequently the most difficult agents to convince are not foreign, but domestic. Once a deal is reached, it needs approval from Congress, where democrats have a slim majority and Republicans have already criticized the plan. Republicans have voiced concerns “that the [Organization for Economic Cooperation and Development] changes could directly reduce U.S. tax revenues and also leave the door open to other countries’ continued attacks on U.S. companies and our domestic tax base,” according to the Financial Times.  

Last but not least, communication is essential for the success of this proposal and it will need to focus on reducing distrust in corporations and governments, the need for revenue post-COVID, and also on the fairness of the deal. Communication efforts will have to emphasize how the deal might reduce popular distrust in corporations and “humanize” their brands. For that to happen,  multinational companies need to take ownership of the proposal and governments need to regain citizens’ trust by fixing a flawed and unfair corporate tax system. Communication should also stress the need for money to finance recovery after the pandemic, to prevent similar disasters in the future and contribute to global welfare through SDGs.  

Fairness is another crucial element of the narrative. While corporations do not break the law by shifting profits abroad, their practice is certainly not fair to the other taxpayers who pay a much higher percentage of their income in taxes to governments — multinationals may occasionally get away with paying close to zero federal taxes. This rationale must be conveyed with maximum transparency through traditional and new communication channels. Particular attention should be given to social media, which can decisively influence diplomatic negotiations and even determine their success or failure. 

All three C’s (calibration, coordination and communication) are of key importance. Companies need to be accountable for the taxes they pay in the countries where they operate and governments need to be accountable for the way they use the tax revenue. Spending the tax money on sustainable goals based on global consensus, such as SDGs, may pave the road toward a deal.   

Ioana Maria Petrescu is a former finance minister of Romania and senior fellow at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School. Follow her on Twitter: @petrescu_ioana 

Alvaro Renedo Zalba is former Rafael del Pino-Ministry of Foreign Affairs of Spain fellow at the Belfer Center for Science and International Affairs at the Harvard Kennedy School and served as director of the Department of European Affairs and G-20 in the presidency of the Government of Spain from 2016 to 2018.