Momentum is building for a global tax system targeting large corporations, including big tech companies. Previous attempts to reach agreement have failed due to a lack of consensus on both sides of the Atlantic.

However, the tide is turning, with three main factors making a global tax reform a real possibility. Firstly, the world’s largest economy is leading the efforts. Secondly, there is an unprecedented consensus on reigning in digital markets, and thirdly, governments worldwide need to bolster their coffers to survive the Covid crisis.

Tax reform is key to Biden‘s economic stimulus

President Biden is counting on higher corporate tax revenue to fund new spending on infrastructure and social programs. His plan includes raising taxes on US companies and pushing for a 21% minimum levy on US companies’ foreign income, which could pressure many countries to raise their current rate.

Such efforts are giving fresh impetus to the OECD’s efforts to broker an agreement among about 140 countries on new rules addressing how digital firms are taxed and create a minimum global levy. According to the Institute on Taxation and Economic Policy, at least 55 large US companies, including Nike and FedEx, reported paying no US federal income taxes in 2020 even though they were profitable.

Covid-19 has highlighted the limitations of the current tax system

At a time when much of the global economy is still in trouble, digital platforms like Amazon, Microsoft, Facebook and Google are showing incredible resilience. They have even emerged as beneficiaries of the pandemic in booming sectors like ecommerce, collaboration tools, digital payments, and cloud computing. Big Tech companies’ tax avoidance has rarely appeared more unethical and indefensible than it does today.

Digital giants Google, Facebook, and Apple have become adept at using complex company structures to shift profits out of major markets like the UK and into low-tax jurisdictions like Ireland and the Caribbean.

Economists estimate that the sums lost to exchequers worldwide from profit-shifting have risen as high as $427bn (£311bn) annually. Countries, as well as corporations, can benefit from this arrangement. Ireland, with a corporate tax rate of 12.5% – among the lowest across industrialized nations – boasts the European headquarters of companies including Google, Facebook, and Apple. According to the Tax Foundation, among the 27 members of the EU, corporate tax rates range from 9% in Hungary to 31.5% in Portugal.

Governments squeezed by coronavirus costs will welcome reforms

Tax reform appears more urgent than ever given the profound economic consequences of the pandemic, at a time when unprecedented policy measures are being taken to support public services, businesses, and households.

These policies have led governments to spend much more and raise much less in tax revenues than originally planned. The US and UK governments have spent around 37% of their GDP on stimulus packages between February 2020 and April 2021. Italy and Japan have seen this percentage reach around 58% each.

However, President Biden will face stiff opposition from Republicans in a Congress that is split 50-50. Meanwhile, G20 finance ministers intend to work towards a deal through the OECD, hoping to overhaul the global tax system before their July summit.

However, until global tax reform is sealed at the OECD level, corporations will continue to try to hide their profits in tax havens.