Many countries want to link an agreement to the more difficult question of taxing profit rights
CORPORATE TAXATION is one of the most sensitive issues in international economic policy. Janet Yellen, President Joe Biden’s Secretary of the Treasury and former head of the Federal Reserve, weighs in. On April 5, she caught the attention of corner office residents around the world with a speech to the Chicago Council on Global Affairs. The headline was a call for countries to agree on a global minimum tax rate for large companies.
Such a levy, Ms. Yellen said, would help “ensure that the world economy thrives on a level playing field” and would help end a “30 year race to the bottom”. Although the idea of a minimum tax is causing trouble for tax havens in the Caribbean, parts of Europe, and beyond, many other major American economies will welcome renewed engagement in multilateralism on taxes following the prickly unilateralism of the Trump years.
Over the past decade, the increasing avoidance of corporate taxes has met with a growing backlash. Breakneck globalization made it possible for multinationals to replace the fear of double taxation with the joy of double non-taxation and to play the system with ports. By exploiting inconsistencies between the tax laws of the countries, taxable profits could be reduced or even made to disappear. The game has gotten easier with the advent of intangible assets that are easier to move between jurisdictions than buildings or machines. Big tech has been a big beneficiary: the five biggest Silicon Valley giants paid $ 220 billion in cash taxes over the past decade, only 16% of their accumulated pre-tax profit.
Numerous discussions to solve the problem were held under the auspices of the OECD, a club from mostly rich countries. However, progress has been slow. Frustrated, dozen of countries – from Belgium and the UK to India and Indonesia – have introduced or proposed “Taxes for digital services” (DSTs) for the local sale of foreign companies with online platforms. The Trump administration said these taxes discriminated against American business and threatened tariffs.
However, the Trump administration had approved the idea of a minimum tax. in fact, it adopted its own version as part of the Law on Tax Cuts and Jobs in 2017. Mr Biden is pushing for new reforms. He wants to raise the federal domestic key interest rate (which is partially reversing Donald Trump’s cuts) from 21% to 28% – and most importantly, raise the tax rate on the profits of American companies overseas from 10.5% to at least 21%, calculated for a Country. by country, so that all tax havens are included.
The hope is that the proceeds will help fund a planned upgrade of the country’s infrastructure by more than $ 2 trillion. Republicans in Congress and groups representing big companies complain that higher tax rates are hurting American competitiveness. That argument is blunt if other large economies agree to lower the global rate.
The minimum tax is one of two “pillars” at the center of the negotiations mediated by the OECD. The talks have been reasonably constructive, even with Team Trump, officials say. However, the turmoil over setting a minimum amount persists, especially among low-tax EU members like Ireland, which has a meager corporate tax rate of 12.5%. If a global minimum of 21% were in place, American companies operating in Ireland – of which there are many – would have to pay an 8.5% top-up tax to their government on top of the 12.5% paid to Dublin, which is undermines Irish advantage.
In addition, most countries want negotiations on the two pillars that are held together – and the second pillar is much less understandable. The point is to find a mutually acceptable way of gaining tax rights on companies’ profits in markets where they have customers but no physical presence (as is often the case with companies like Amazon and Facebook outside America is).
Earlier this year, it was reported that Ms. Yellen had dropped the Trump administration’s proposal to allow American companies to enter a new tax rights allocation system (why a company would choose it is unclear). That removed one major barrier to a deal, but by no means the only one. Many of the companies affected by DSTs pay an oversized portion of their taxes to the American government. In order to reach an agreement, Ms. Yellen must be unusually ready to share with other countries.
The most optimistic voices speak of an agreement that both pillars should be sealed by the end of June. Many doubt that this is possible. It took years to agree to pick and toss low-hanging fruit, such as tax tricks with in-house loans or the “Double Irish with a Dutch Sandwich”, which profits from EU subsidiaries in tax havens like Bermuda and the USA forwarded Cayman Islands.
A key variable is the rate at which the global minimum is set. Some officials believe that after all the horse trading, it could be little more than the Irish tax rate of 12.5% - not very different from the average cash tax rate that American tech companies actually pay. As for the redistribution of tax rights, even the proponents accept that they cannot skim much more than $ 10 billion in additional revenue worldwide. The OECD estimates that corporate profit-shifting deprives the treasury of US $ 100 to 240 billion a year.
In the meantime, the Biden administration continues to tense muscles, even though it speaks in a softer voice than its predecessor. Work continues to impose tariffs of up to 25% on certain goods from six countries that use daylight saving time, including the UK and Turkey. This may be a tactic to encourage others to reach an agreement at the OECD. If so, hope it works. The alternative is a global challenge as national technology levies become the norm. ■
