West is losing tax sovereignty – Britain must resist

A global minimum levy on multinationals may sound tempting but it is the thin end of a dangerous wedge

‘An ability to set tax rates is perhaps the key defining feature of a state that has control over its own affairs’

It will stop the race to the bottom. It will make sure global multinationals finally pay their fair share. It will put a few tax “havens” out of business and it will raise the money needed to preserve welfare states.

Plenty of grand claims have been made for the global minimum tax rate, which, after several years of painful negotiations, finally started to come into force yesterday.

Yet the global minimum rate will also end national sovereignty over tax – and Britain should get out before it is too late. Amid the fireworks and the popping of champagne corks, it would have been easy to miss something of real significance that happened as the clocks struck midnight on Sunday. But as of Jan 1 this year, we have a “global minimum” rate of corporation tax.

Led by the OECD, and with the enthusiastic backing of Joe Biden, the US president, the new tax regime has been agreed in principle by 140 countries around the world, including low tax environments such as Ireland, Luxembourg and Barbados.

A 15pc minimum rate will be imposed on companies with global revenues of more than €750m (£653m) and if they reduce that by shifting revenues to a different jurisdiction, it will simply be charged elsewhere. In theory, it will stop multinationals shuffling revenues and profits from one country to another to take advantage of lower tax rates.

On the face of it, such a scheme might have its advantages. If you are going to have corporate taxes, they need to be applied across the board. Ireland has recorded such bumper tax revenues as a consequence of its 12.5pc rate of corporation tax (much lower than in many other nations) that it is launching a sovereign wealth fund to stash some of it away. And the OECD, the driving force behind the reform, estimates that the global minimum tax could raise an extra $220bn (£173bn) in annual revenue. It is money that is badly needed as debt costs soar and welfare spending keeps rising. And it can be raised, so politicians seem to believe, without upsetting electorates. Even so, the new tax is still a terrible idea and one that should have been killed off at birth. Here’s why.

First, it is expensive and complex to implement. Around 50 countries will be imposing the tax from this week, including members of the European Union, Canada, Australia and Japan. But it won’t include, to start with, the US (which is curious, since Biden was among its main supporters) or China. When the two largest economies in the world are not yet part of the agreement it seems pointless for the rest of us to even bother.

Even worse, it is incredibly expensive to administer. According to a report from the Cato Institute think tank, Germany estimates it will have to spend $76m imposing the levy, so if all the 140 signatories have to spend similar amounts the tax will cost $11bn globally just in paperwork. And that is just public administration. Cato estimates another $5bn will be spent in the private sector complying with the new rules. In reality, it is an administrative nightmare that will cost vast sums.

Next, it will restrict national competition on tax rates. The Left, and the big state cheerleaders that seem to dominate bodies such as the OECD, might loathe the idea of any form of competition. But, just as having a choice between different products benefits consumers, and keeps companies on their toes, rivalry between different tax systems is what imposes some discipline on governments that would otherwise tax and spend without any form of limit.

Governments have to keep tax rates reasonable, because if they don’t companies will simply move elsewhere. The UK is about to get a harsh lesson in that with its illconceived move to lift its corporate rate from 19pc to 25pc in a single step: over the next few years, plenty of companies will decide to leave Britain. If finance ministers don’t have to keep a nervous eye on what their major rivals in other countries are doing, they will keep on raising rates without limit – until the economy begins to collapse.

Finally, the new tax is also a monstrous intrusion on national sovereignty. The ability to set its own tax rates is perhaps the key defining feature of a state that has control over its own affairs. That applies to corporate taxes just as much as it does to individual ones. The global minimum rate effectively brings that to an end, ceding the power to set tax rates to unelected officials. The 15pc minimum rate may not seem so bad right now, and it will only mean increases for a handful of countries that charge less than that at the moment, but no one should kid themselves that it will end there. Once the 15pc floor is established, and the mechanisms for enforcing it are in place, we can expect politicians to find one emergency or another to raise it to 20pc and then 25pc.

Furthermore, the global corporate tax is the thin end of a very dangerous wedge. We will start with worldwide levies on companies, but very soon we could have global green levies as well, and then international wealth and inheritance taxes, and perhaps a global income tax as well. It will grow and grow, until voters in individual countries find they have no control over how they are taxed any more.

The global minimum tax may sound plausible. It is always easy to whip up a case against tax “dodging” global multinationals and to imagine that there is a free pot of money that can be raided to make someone else pay for constantly rising government spending. But it is a terrible idea. The UK should never have signed up to it in the first place – and now that it is finally coming into force we should get out while there is still time.