Yellen said earlier this month that she was working with G20 countries to agree on a global minimum, which she said could help end “a 30-year race to the bottom in interest rates.” ‘corporate taxation’.
WHY A GLOBAL MINIMUM TAX?
Major economies seek to discourage multinationals from shifting their profits – and tax revenues – to low-tax countries, regardless of where their sales are made. Increasingly, income from intangible sources such as pharmaceutical patents, software and intellectual property royalties have migrated to these jurisdictions, allowing companies to avoid paying higher taxes in their home countries. traditional.
With a widely accepted global minimum tax, the Biden administration hopes to reduce this erosion of the tax base without putting American businesses at a financial disadvantage, allowing them to compete on innovation, infrastructure and other attributes.
The Trump administration first attempted to capture revenue lost in tax havens with a U.S. offshore minimum corporate tax in 2017. The “Global Intangible Low-Taxed Income,” or GILTI, tax rate does not was only 10.5%, half the national corporate tax rate. .
WHERE ARE THE INTERNATIONAL TAX TALKS?
The Paris-based Organization for Economic Co-operation and Development has for years coordinated tax negotiations between 140 countries on two major efforts: establishing rules to tax cross-border digital services and curbing the erosion of the tax base, with a worldwide minimum tax on corporations forming part of the latter.
OECD and G20 countries aim to reach a consensus on both fronts by mid-year, but talks on a global minimum for business are technically simpler and politically less contentious.
Since the talks are consensus-based, countries are expected to agree to a deal, no matter how unpleasant for some low-tax countries.
The minimum tax is expected to make up the bulk of the $50 billion to $80 billion in additional corporate taxes that the OECD estimates companies will end up paying globally if deals on the two efforts are struck.
HOW WOULD A GLOBAL MINIMUM TAX WORK?
The overall minimum tax rate would apply to overseas business profits. Therefore, if countries agree on a global minimum, governments could still set the local corporate tax rate of their choosing.
But if companies pay lower rates in a particular country, their home governments could “raise” their taxes to the agreed minimum rate, eliminating the benefit of shifting profits to a tax haven.
The Biden administration has said it wants to deny tax exemptions paid to countries that don’t agree to a minimum rate.
The OECD said last month that governments already had broad agreement on the basic design of the minimum tax, although the rate remains to be agreed. International tax experts say this is the trickiest issue.
Other elements still need to be negotiated, including whether sectors such as investment funds and real estate investment trusts should be covered, when to apply the new rate and ensuring that it is compatible with the US tax reforms of 2017 to deter base erosion.
WHAT ABOUT THIS MINIMUM RATE?
The Biden administration wants to raise the corporate tax rate in the United States to 28%, so it has proposed an overall minimum of 21%, which is double the rate of the current GILTI tax. He also wants the minimum to apply to U.S. businesses regardless of where the taxable income is earned.
This proposal is well above the 12.5% minimum tax that was previously discussed in OECD discussions – a level that matches the corporate tax rate in Ireland.
Ireland’s economy has boomed in recent years thanks to the influx of billions of dollars of investment from foreign multinationals, so Dublin, which has resisted attempts by the European Union to harmonize its tax rules for more than a decade, is unlikely to agree to a higher minimum rate without a fight.
However, the battle for Ireland and other low-tax countries is less likely to try to derail comprehensive talks and more to build support for a minimum rate as close to its 12.5 as possible. %.
