SGI’s Cautious Optimism Regarding the G7’s Global Tax Rate
Summer 2021 saw major changes in the way the global economy functions. The G7 started off by deciding on a 15% global minimum tax rate, a decision later backed by 130 countries. The decision also states that big companies must pay taxes in countries where they generate sales, rather than just where they have a physical presence. The overwhelming support for this restructuring of international tax configuration, although not universal, highlights that there is a global push to frame our economies differently and close the loopholes major companies have profited from for years.
What does this really mean? As it currently stands, many developing nations have tried to encourage foreign companies to come establish themselves to help build their economy. Ireland famously found economic success in the tech sector by offering low corporate taxes. However, this success story has not been replicated everywhere. Governments in countries like Ghana, which face challenges from the informality of their country’s economy, try to attract foreign businesses because it is easier to monitor them. For example, Ghana offers tax cuts for foreign firms investing in Ghana’s agribusiness and Information Technology Enabled Services and Business Process Outsourcing (ITES-BPO). These foreign investors in ITES BPO receive a 10-year income tax holiday on corporate taxes within Ghana’s Free Trade Zone, which then only goes up to 8% for the subsequent years. But if the new law says they have to pay taxes where they generate sales, then this removes the benefits of settling in places where there are tax holidays for foreign companies.
At first glance, this new global tax rate sounds like it could cause more problems than solutions for countries like Ghana, so why did 130 countries agree to implement it? Countries that try to attract investment from these foreign firms by offering tax cuts and holidays must be mindful of the type of businesses they are inviting in. Yes, bringing in new businesses sounds like a good idea, but in the long run, does this type of response stimulate the overall economy? Are these foreign businesses promoting inclusive economic growth? Are they hiring Ghanaians and contributing to the local economy? The best way to strengthen one’s economy is to invest in the country’s primary resource: its citizens. The global tax rate hopes to encourage this type of investment. Not only will this policy ensure that big companies are paying their fair share of taxes, but more importantly it seeks to keep developing nations from relying on these tax cuts to attract investment. Instead, the hope is that countries will turn towards investing in the development of their own human resource capital to offer a more attractive labor force.
At the very least, that is how it should work in theory. In reality, however, it is also imperative that this global tax policy is coupled with a push to invest in the ICT sector, human resources, and economic independence in countries that previously weren’t benefiting from the current global economic structure. It is not enough to remove the option of offering tax cuts to attract foreign investments. There also needs to be a way to internally strengthen the nation’s economy by investing in the tools to build an inclusive robust economy. These efforts include inclusively developing education and professional development opportunities, restructuring the financial sector, offering additional help to MSMEs and generally encouraging local entrepreneurship, and strengthening the ICT sector. Without these complementary efforts, the G7’s decision will simply further hurt developing nations.
Authored by Lale Ceylan
SGI’s International Relations & Development Working Group
Works Cited:
Hewitt Associates. 2006. Improving Business Competitiveness and Increasing Economic Growth in Ghana: The Role of Information and Communication Technologies & IT-Enabled Services. Washington, DC: infoDev / World Bank. Available at: http://www.infodev.org/en/Publication.170.html