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CORPORATE TAXATION is one of the thorniest issues in international economic policy. Janet Yellen, Treasury Secretary to President Joe Biden and former head of the Federal Reserve, duly intervened. On April 5, she caught the attention of corner office occupants 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 corporations.
Such a tax, said Ms Yellen, would help “ensure that the world economy thrives on a more level playing field”, and help end a “30-year race to the bottom”. While the idea of ââa minimum tax raises concerns in tax havens across the Caribbean, parts of Europe and beyond, many other major economies will welcome the renewed US commitment to multilateralism. tax after the thorny unilateralism of the Trump years.
Over the past decade, growing corporate tax avoidance has met with growing backlash. Unbridled globalization has allowed multinationals to replace fears of double taxation with the joys of double non-taxation, using havens to play with the system. By exploiting the disparities between countries’ tax laws, taxable profits could be reduced or even eliminated. The game has become easier with the increase in intangible assets, which can be moved between jurisdictions more easily than buildings or machines. Big tech has been a big beneficiary: Silicon Valley’s five biggest giants have paid $ 220 billion in cash taxes over the past decade, or just 16% of their cumulative pre-tax profits.
Many rounds of talks aimed at resolving the issue have taken place under the auspices of the OECD, a club of mostly wealthy countries. Progress, however, has been slow. Frustrated, dozens of countries – from Belgium and Great Britain to India and Indonesia – have introduced or proposed “digital services taxes” (DST) on local sales of foreign companies with platforms in line. The Trump administration has said the levies discriminate against U.S. businesses and threaten tariffs.
Yet the Trump administration had accepted the idea of ââa minimum tax; indeed, he enacted his own version as part of the Tax Cuts and Jobs Act in 2017. Biden advocates further reforms. He wants to raise the domestic federal business rate (partially reversing Donald Trump’s cuts) from 21% to 28% and, most importantly, increase the overseas profit rate of US businesses from 10.5% to at least 21. %, calculated on a country-by-country basis so that it captures all tax havens.
The hope is that the proceeds will help fund a planned over $ 2 billion infrastructure upgrade in the country. Republicans in Congress and groups representing big business complain that higher tax rates hurt America’s competitiveness. This argument is blunted if other major economies agree to set a floor for the world rate.
The minimum tax is one of the two âpillarsâ at the center of the negotiations negotiated by the OECD. Discussions have been reasonably constructive, even with Team Trump, officials said. But unease about setting a floor persists, especially among low-tax EU members like Ireland, with its meager corporate tax rate of 12.5%. If an overall minimum were set at 21%, American companies operating in Ireland – of which there are many – would have to pay an additional 8.5% tax to their government, on top of the 12.5% ââpaid in Dublin, thereby reducing the Irish benefit. .
In addition, most countries want the negotiations on the two pillars to stay together â and the second pillar is much less manageable. This involves finding a mutually acceptable way to share the rights to tax corporate profits in markets where they have customers but lack a physical presence (as is often the case with companies like Amazon and Facebook outside. the United States).
Earlier this year, it was reported that Ms Yellen had dropped the Trump administration’s proposal to let U.S. businesses go for any new taxing rights allocation system (why a business would choose to do so is not clear). This removed a big obstacle to a deal, but by no means the only one. Many companies targeted by DST pay an inordinate share of their taxes to the US government. To make a deal, Ms. Yellen will need to be exceptionally willing to share with other countries.
The most optimistic voices speak of an agreement on the two pillars sealed by the end of June. Many doubt that this is possible. It took years to come to an agreement on the picking and disposal of the fruits at hand, such as the tax hoax involving intra-company loans, or the ‘Double Irish with a Dutch Sandwich’, which carried profits through EU-based subsidiaries to tax havens such as Bermuda and the Cayman Islands.
A key variable is the rate at which the overall minimum is set. Some officials believe that after all this haggling, it could be a little more than Ireland’s 12.5% âârate, which isn’t much different from the average cash tax rate that tech companies do. Americans actually pay. As for the reallocation of taxing rights, even its champions accept that it cannot skim more than $ 10 billion in additional revenue around the world. The OECD estimates that corporate profit shifting robs treasuries of $ 100-240 billion a year.
Meanwhile, the Biden administration continues to build muscle, even though it speaks in a softer voice than its predecessor. It is continuing its plan to impose tariffs of up to 25% on certain products from six countries with DST, including Great Britain and Turkey. Perhaps this is a tactic to encourage others to make a deal at the OECD. If so, hopefully it works. The alternative is a global tit-for-tat, as national taxes on technology become the norm.
A version of this article was posted online on April 6, 2021
This article appeared in the Finance & economics section of the print edition under the title “Setting a floor”