The implications of a global minimum tax for international mobility

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  • tax
Published on 2021-11-16 at 10:00 by Maria Iotova
  To prevent the relocation of big companies and corporations to countries with low tax rates and stop the offshoring of their profits to tax havens, America's 46th president, Mr. Joe Biden, advocates a global minimum corporation tax of at least 15%. The Group of Seven has also backed Biden's proposal. The finance ministers of the G7 agreed to battle tax avoidance by making companies pay more in the countries where they do business.

We will leave it to the world's best economists and economic analysts to decide what a potential reform of this size would mean for the global economy and individual countries. However, due to our experience in expat living, we take this opportunity to look into the impact that a global minimum tax is likely to have on international mobility. Given today's patterns around talent mobility and companies' eagerness and capacity to employ an international workforce and move employees to offices in different countries, what would the suggested universal minimum tax rate mean for global mobility? 

Currently, due to tax competition and responsiveness of countries to tax changes happening in other countries, companies and employees benefit from free mobility. For example, American companies have offices in Ireland and the Netherlands, where currently corporate taxes are among the lowest in the EU (12.5% and 15%, respectively). Suppose a global minimum tax applies, which will dictate that an American company, regardless of whether it operates from the US or Ireland will have to pay the same amount of tax to the country in which it operates. In that case, there won't be motivation for this company to set up offices in Ireland anymore, decreasing workforce mobility from the US to Europe. 

Evidence suggests that companies' decision on whether their production will be happening locally or abroad and the type of investment (if any) they will make abroad is affected to a certain extent by tax rates. With a minimum global tax, companies will have fewer motives to set their sights on moving abroad.  

For the time being, we can all agree that implementing a global minimum tax rate cannot be a straightforward activity. Different sovereignties will have different views on how much this tax should be. It is also hard to imagine tax havens letting go of their uniqueness without opposing the reform that will eliminate their privileges. Similarly, the vast economies of Russia, China, and Brazil will make sure their pro or con arguments are heard.

An international tax agency and cross-country collaboration are undoubtedly the best solutions for a vision like this. However, research has shown that tax is closely related to social behavior — for example, tax evasion is more common in a Mediterranean country like Greece than it is in Nordic countries. 

Each country has the right to do its best to attract investment from corporate giants, international talent, and knowledge. And that can only be named “fair” from the perspective of tax havens and lowest tax countries. For example, as we speak, companies can set up local branches in different countries and pay the local corporate tax rate defined by each country, even if the profits come from sales elsewhere. So, this is what G7 agrees to change: companies will pay tax in the country (or countries) where they are selling their products or services and stream revenue — not in the country they declare their profits and are physically located for tax purposes. A global minimum tax will stop countries from competing with each other. Will a global minimum tax also mean that the exchange and sharing of knowledge will come to a standstill? Will countries become more introverted, and there won't be good enough reasons for international collaboration? Will that mean dangerously less exposure to “otherness”?

According to the United Nations, in 2019, the international migrant stock was almost 272 million people, the majority of which come from high-income countries, meaning they are well-educated and skilled professionals. Globalization and immigration expose people to diversity, challenging them to see things differently, think in new ways, and divert from stereotypes about others. At the end of the day, people who have been exposed to more diversity tend to realize that, as American novelist V. T. Nguyen has said: “we all share much more in common with one another than we have in difference.” But what will happen to our cultural intelligence, if we have less reasons to move around?