Toward a Fairer System: Reforms and the Way Forward
So what can be done to curb egregious tax avoidance and restore greater fairness? Policymakers and experts have proposed a range of reforms, from internationally coordinated rules to national-level legislation. Here are some of the key paths forward being considered or implemented:
- A Global Minimum Tax: Perhaps the most ambitious recent reform is the introduction of a worldwide minimum corporate tax rate. As noted, more than 130 countries – including all the major economies – agreed to set a minimum effective tax rate of 15% on multinational corporations. The mechanism for this global minimum tax (part of the OECD’s Pillar Two) is that if a company manages to pay below 15% in some low-tax country, then its home country (or another country where it operates) will impose a supplemental tax to bring the rate up to 15%. This drastically reduces the incentive to shift profits to havens, since the tax will eventually be collected regardless. In practice, each country is now enacting its own version of a minimum tax rule in domestic law. The European Union, for example, issued a directive requiring all member states to apply the 15% minimum for large multinational groups starting in 2024. Other countries like the UK, Canada, Australia, Japan, and South Korea are moving forward too. While enforcement of this globally will be complex and it won’t eliminate all avoidance (companies can still try to game which country’s profits get taxed where), it sets a worldwide floor. That’s a historic shift – essentially the nations of the world saying that no matter what, multinational profits shouldn’t slip through below a certain tax level. Some campaigners argue the rate should be higher than 15% to truly dissuade avoidance, but even this agreement represents significant progress after decades where tax competition drove rates lower and lower.
- Greater Transparency and Reporting: Another important avenue is increasing transparency around corporate taxation. One concrete proposal is public country-by-country reporting of tax and financial data. This would require multinationals to publish, for each country in which they operate, basic figures like revenue, profit, number of employees, and taxes paid. The idea is that with this information in the public domain, it becomes much easier to spot aggressive avoidance – if, say, a company shows hundreds of millions in profit in Bermuda (with 3 employees) and losses in major markets, that’s a red flag. Some jurisdictions are pushing this forward. The European Union has adopted a law that will make large multinationals disclose certain data for their operations in EU countries and a few designated tax havens. In the U.S., there are bills proposed (though not yet passed) to mandate public country-by-country reports for American multinationals. Additionally, transparency is improving among tax authorities themselves: thanks to the original BEPS measures, tax agencies now exchange country-by-country reports privately, and there are automatic exchanges of information on bank accounts (to combat individual evasion) which also indirectly reveal corporate money flows. With more transparency, the cloak of complexity begins to fall – it’s harder to hide profits in the shadows when numbers must be laid bare. Transparency won’t directly stop a tax avoidance scheme, but it can change the calculus for companies that care about reputation and can empower regulators, journalists, and citizens to hold companies accountable. Just knowing that they might have to justify their tax arrangements publicly can push companies towards more moderate, defensible positions.
- Stronger Anti-Avoidance Rules: Many countries are tightening their domestic laws to catch avoidance before profits leave the country. For example, one reform is stricter Controlled Foreign Corporation (CFC) rules that tax certain income of overseas subsidiaries currently in the parent company’s hands if that income is in a low-tax haven and is more passive (like royalties or interest). The logic is to prevent companies from simply parking mobile income in shell subsidiaries. Another common reform is limiting interest deductions to a percentage of earnings, which stops companies from loading too much debt into high-tax jurisdictions (this was part of both the OECD BEPS package and the EU directives, and countries from Germany to Japan to Brazil have such rules now). Moreover, governments are writing specific provisions to neutralize known strategies: for instance, outlawing the Double Irish scheme by changing residency rules (Ireland did this), or requiring that any payments to tax havens be subject to withholding taxes or extra scrutiny. We’ve also seen more use of withholding taxes on royalties and fees leaving a country, ensuring that at least some tax is collected at the source before income can head offshore. Additionally, as mentioned earlier, GAAR clauses provide a broad ability to invalidate transactions that are abusive. The challenge with anti-avoidance rules is that it can be like a game of whack-a-mole – patch one loophole, and clever accountants find another. Still, each incremental rule raises the bar, narrowing the channels through which profits can be siphoned out untaxed. The cumulative effect of dozens of such tightened rules across many countries is a more confined space for avoidance and greater risk that aggressive tax plans will be caught and penalized.
- Unitary Taxation and Formula Apportionment: A bold reimagining of the system, advocated by many academics and justice campaigners, is to abandon the fiction that a multinational’s subsidiaries are separate entities trading with each other at arm’s length. Instead, treat the multinational as one single firm for tax purposes (unitary taxation) and apportion its global profits to the countries where it does business based on a formula. The formula could factor in things like the company’s sales in each country, its payroll (employees) in each country, and maybe its physical assets in each country – proxies for real economic activity. Each country would then tax its apportioned share of the profit at its own rate. This approach would essentially wipe out profit shifting, because there’d be no intercompany prices to manipulate; whether a company tried to book profits in Bermuda would be irrelevant, since Bermuda has no share of the formula unless the company genuinely has sales or employees there (which in most cases are minimal). Some parts of the world already use formula apportionment internally – for example, U.S. states for state corporate taxes, and Canada’s provinces use formulas to split up income of companies operating in multiple provinces. However, doing this internationally is a heavy lift. Countries are reluctant to give up their sovereignty in choosing how to tax (and there would be winners and losers – some countries like Ireland that attract a lot of booked profits would lose out when those profits get reassigned to bigger markets). Nevertheless, the idea is gaining more attention as a long-term solution. Even the OECD’s Pillar One, although far from full unitary taxation, nods to it by proposing to allocate some profit of the largest companies based on sales in each country. Unitary taxation could also simplify things greatly: instead of endless transfer pricing disputes and complicated avoidance schemes, companies would just pay tax proportionate to real factors. It may not happen globally overnight, but some argue that regional blocs (like the EU) could move to a formulary apportionment among their member states. That would diminish intra-European profit shifting and could serve as a proof of concept for a broader application later.
- Digital Economy Reforms: Considering the unique challenges of digital business models, reforms here aim to ensure tech firms pay taxes where they have users or customers. Pillar One of the OECD plan is the flagship proposal: allocate a portion of the profits (above a routine margin) of the very largest multinationals to the countries where they have significant consumer markets, regardless of physical presence. This would ensure tech giants pay more tax in countries where their users or customers are located. Separately, some countries have attempted interim measures like digital services taxes on gross revenues from online activities. The broader idea is to modernize tax rules so that where value is created – including by users contributing data or by market intangibles – is reflected in where taxes are paid.
- Enhancing Global Cooperation and Inclusion: All these reforms have a better chance of success if countries work together rather than at cross purposes. A major lesson from the last decade is that unilateral action – like one country trying to tax foreign companies more – can be circumvented by multinationals shifting elsewhere or can lead to trade conflicts. So strengthening international cooperation is key. The Inclusive Framework on BEPS (which now includes over 140 jurisdictions) is one venue for that, ensuring that not just rich countries but also developing ones are at the table. There are also calls to empower the United Nations in tax matters, given its more universal membership. For instance, developing nations have proposed a UN Tax Convention to formalize principles of fair taxation and boost support for them to combat avoidance. Beyond rule-making, cooperation means practical enforcement help: sharing data, joint audits of multinationals, and capacity building so that poorer countries can negotiate fair tax treaties and challenge abusive practices. Some efforts are targeting the enablers of avoidance too – banks, law firms, and accounting firms that design opaque structures. By imposing stricter ethical standards or penalties on those facilitators, it could deter the most aggressive schemes from being marketed in the first place. Finally, continued peer pressure through groups like the G7 and G20 helps maintain momentum; these political forums have repeatedly affirmed that international tax dodging is a problem that needs collective solving. The end goal of all this cooperation is to ensure that in the future, companies don’t have free rein to play one country’s laws against another’s. Instead, countries are trying to present a united front: closing ranks so there’s no easy escape hatch, and ensuring a fairer distribution of tax revenue in line with where economic activity and value creation actually occur.