Every year, countries lose nearly $500 billion in tax revenues-- that could support vital social services-- due to tax dodging from multinational corporations. The strategies pursued by these entities – under the umbrellas of tax avoidance (legal but harmful) or tax evasion (illegal and harmful) – increase corporate profits while undermining governments’ abilities to collect the revenues necessary to protect human rights and provide public goods and services. This makes the impacts of these corporate behaviors not merely fiscal, but also a threat to the protection of human rights, representative democracy, and the creation of systems enabling a more just economy.
This year, states will begin implementing a global minimum tax rate of fifteen percent on multinational corporations with more than €750 million (about $810 million) in revenues. If these tax reforms succeed in increasing tax revenues across the approximately 140 implementing countries as they intend, these additional funds could be used to advance the social and economic rights of their citizens, especially for the most vulnerable populations, including those whose rights have been abused by corporations historically. However, the coming tax reforms are still so riddled with gray areas regarding form and function that it is too early to call the initiative a victory in corporate accountability.
This blog post proceeds by first discussing the nexus between tax and human rights, before turning to the new global minimum tax and considering its strengths and weaknesses.
Corporate Taxes and Human Rights
There is a strong, albeit often understated, relationship between tax policies and the fulfillment of human rights obligations, as both areas are fundamentally about the relationship between persons (legal and natural) and the state. Tax policies are revenue-generating tools that states use to address inequality and discrimination, tackle poverty, fund development, and contribute to the realization and enjoyment of social and economic rights. Additionally, they are arguably necessary backstops on the current economic systems that primarily benefit large corporations at the expense of vulnerable populations, including workers. A state’s careful design and implementation of tax policies can fundamentally shape the lives of the people living within its borders and the companies that incorporate within it. When tax policies provide significant loopholes for corporations and permit tax evasion and avoidance through lax implementation and monitoring of existing regulations, states (and natural persons who pay taxes) are deprived of the resources necessary to address the social and economic needs of their populations (i.e., healthcare, access to affordable medicines, education, an adequate standard of living).
For decades, many countries have maintained weak tax policies while multinational corporations have exploited these loopholes or mismatches in policy to divert profits to more favorable jurisdictions and dodge taxes, robbing states and, in turn, communities of resources that could promote human rights. This occurs despite the clear legal and moral obligations that both states and corporate actors hold with respect to human rights. Enter the initiative for a global minimum tax on large companies.
The Global Minimum Tax
The global minimum tax is a cross-border tax reform initiative, put forward by the Organization for Economic Cooperation and Development (OECD), that raises the global tax rate on the profits of certain large multinational enterprises to at least fifteen percent. The OECD has long encouraged enterprises to adhere to “both the letter and spirit of the tax laws” but has only set forth a negotiated “floor” for large companies over the last several years. Initial agreement was reached in 2021, when nearly 140 countries signed on to a set of negotiated rules and consented to implementing the agreement into their domestic tax laws by 2024.
The reforms are supposed to be designed to end the tax impact equivalent to the race to the bottom that occurs as corporations seek out tax havens and countries become tax havens to attract corporate investment. Now, if a multinational company is taxed below the fifteen percent rate in one country, other countries can charge a top-up levy to make up the difference, therefore encouraging countries to adopt these rules and discouraging multinational companies from trying to pay fewer taxes in the jurisdictions where they conduct business. This domino-effect design encourages greater country buy-in, which is necessary for successful implementation of the minimum tax. The expected result is that annual tax revenues will increase by around nine percent, or $220 billion, around the world.
As 2024 commences, the first round of implementing jurisdictions includes the European Union, the United Kingdom, Japan, South Korea, and Australia. Several others, including Ireland, Switzerland, and Barbados, have also signed on despite being historically regarded as tax havens with corporate tax rates as low as 5.5 percent. China and the United States are not party to the agreement despite initially supporting it, but the United States passed its own version of a 15 percent corporate minimum tax in the 2022 Inflation Reduction Act.
Prospects for Success of the Global Minimum Tax
Although states party to the OECD agreement have had three years to plan for tax reforms and implementation and despite the incentive structure for state participation, there is still too much uncertainty surrounding the global minimum tax to call it a success. Immediate concerns are whether implementation will even occur, as this requires the countries involved in the 2021 original framework to honor that commitment and ratify the multilateral convention. At the start of 2024, only 102 of the original 140 states supporting a statement of intent to sign have actually signed the agreement, and even fewer have ratified it, due to the varying requirements of different political systems.
Beyond challenges in agreeing to commit to make necessary tax reforms, there are also challenges in implementing reforms once the commitment is there and reforms are made. For example, a lack of clarity in the agreement indicates that countries may develop carve-outs or criteria-based exemptions for multinationals within their reformed tax codes. There is also the question of how tax competition will evolve and whether companies will increase lobbying and reliance on credits, grants, and subsidies. Finally, the redistribution of expected tax revenues may benefit higher-income countries and disadvantage lower-income countries, including in the jurisdictions where multinational companies subject to the minimum tax rate operate, therefore doing little to address inequality while also disincentivizing participation from a wider range of countries.
Even if the initiative is implemented as intended and corporate tax dodging is disincentivized and corrected on a large scale, there is still no guarantee of a positive human rights impact. While increasing public revenues has great potential for human rights impacts, countries can, of course, allocate their increased tax revenues however they decide. There remains much work to be done to ensure that implementation serves the public.
Conclusion
The global minimum tax on certain multinational corporations is an example of international cooperation being used to combat exploitive corporate practices that impact human rights. While uncertainty abounds about the impact of this initiative, there is room for cautious optimism as news increases of passed or proposed tax reform legislation in countries eager to begin implementation. In the coming months, a better understanding will form around what the tax code modifications entail, what design gaps still need to be addressed, and whether countries are using their increased revenues efficiently and to the benefit of their populations, including the most vulnerable and those who have historically been the most negatively impacted by corporate abuse.
Marie Edouard is a 3L at Harvard Law School and a Legal Intern at Corporate Accountability Lab. Avery Kelly is a Senior Staff Attorney at Corporate Accountability Lab.
