There has been a highly publicized effort over the past two years for an international treaty that would impose a minimum tax on corporate profits in all countries.
The intuitive appeal is simple: companies can use a variety of methods – for example, where they locate their headquarters or how they finance the business – so that profits in an accounting sense occur in a place where corporate taxes are low or zero. A minimum corporate tax in all countries would not eliminate this incentive, but could it improve it?
As I have observed before, this intuitive appeal is quickly blurred by the realities of global corporate taxation. For example, should the profits of a multinational company be allocated among countries based on the location of the company’s production facilities, where sales take place, the legal residence of the business, the “source” from which the profits are generated? through research and development or intellectual property, or through an overall formula that integrates all these factors? International corporate taxation is messy.
The underlying problem, of course, is that governments around the world want to attract productive, job-creating businesses. Even if an international agreement could be signed to prevent governments from attracting business by offering a lower tax rate, they can use other types of subsidies to attract business. Gary Hufbauer mentions some possibilities in “The Global Minimum Corporate Tax Won’t End the Forces Driving Tax Competition” (Peterson Institute for International Economics, October 25, 2022).
Hufbauer points out that even as President Biden’s administration participates in international talks for a global minimum tax, a number of its legislative successes would allow businesses to pay less than the minimum. The Creating Useful Incentives for Semiconductor Production Act of 2022, known as the CHIPS Act? “This law will channel US$76 billion in tax credits and subsidies to large companies producing semiconductors in the United States…In fact, in some estimates, the Biden administration’s three big things — the Infrastructure Act as well as the CHIPS and IRA Acts — could funnel hundreds of billions of dollars in grants and tax incentives that could benefit big business, allowing them to reduce liabilities taxes that would be imposed under the global minimum. Indeed, the Inflation Reduction Act (IRA) explicitly states that semiconductor companies receiving CHIPS assistance can pay tax rates below the US corporate minimum.
It’s not just an American problem, of course. Hufbauer writes:
In today’s highly competitive global economy, public servants are challenged not only to increase tax revenue, but also to save jobs, create jobs, advance technology or deliver services. essential, by deploying government incentives. Managers are not always content to let market forces prevail. The result is a mix of trade protection, subsidies, tax breaks and, in extreme cases, state-owned enterprises, depending on the country and its policy. If open tax competition is ruled out, some officials will likely turn to other means to help favored corporations.
It is only when you read the fine print of the Global Minimum Tax that you see that it provides easy access to these alternatives. Eligible refundable tax credits — credits payable within four years of the designated activity —are not deducted when calculating the tax paid by a company. Under International Financial Reporting Standards (IFRS) accepted by the Organization for Economic Co-operation and Development (OECD), grants may be charged against the cost of an acquired asset and are therefore only indirectly subject to tax over a period of years as the reduced cost of the asset is depreciated or amortized.
Of course, countries monitor how other countries treat large companies. For example, the United States subsidizes semiconductor manufacturers because other countries do it, and other countries subsidize semiconductor manufacturers because the United States does it. Hufbauer writes:
China, Japan, South Korea and Taiwan have long subsidized semiconductor fabs. According to data published by the Boston Consulting Group and the Semiconductor Industry Association, subsidies represent 15% of the cost of manufacturing operations in Japan, up to 30% in Taiwan and South Korea, and up to 40% in China. Again, if a global minimum tax had existed in 2000, it would have made no difference to the incentives for Asian factories. Now that the US federal government has entered the fabulous grant race, Europe too, Indiaand Mexico. Additionally, the CHIPS Act extends its application to two foreign semiconductor giants, Samsung and Taiwan Semiconductor Manufacturing Corporation (TSMC), both of which have announced huge investments in US fabs.
Let’s be clear, the current treaty talks that focus on an overall minimum corporate tax rate would have no effect on these other ways of subsidizing businesses.