Elections have consequences. Pandemics too. These truisms of 21st century politics could fundamentally change the relationship between companies and countries around the world.
Or maybe not. On April 5, US Treasury Secretary Janet Yellen presented the idea of a minimum global corporate tax rate in a speech to the Chicago Council on Global Affairs. Such a move, she said, would allow the post-COVID recovery to go on “a level playing field” and would help end a “30 year race to the bottom” in corporate taxation.
It’s not hard to see where this is coming from. Yellen’s boss, President Joe Biden, has an ambitious national agenda that includes a $ 2 trillion infrastructure plan. Some of what he has planned is deficit-funded, but much of it depends on tax hikes for corporations and the very rich – on them “only paying their fair share,” as Biden said at a joint congressional session last month.
The crippling cost of the pandemic is creating an insatiable hunger for revenue in capital cities around the world. Governments disappointed with the tax strategies of the digital giants – mostly in the US – are pursuing their own taxes on digital services. Canada’s Daylight Saving Time comes into effect next year and is expected to raise $ 3.4 billion over five years.
Former US President Donald Trump’s administration hated summertime and threatened to impose tariffs on the countries that introduce them. Attempts have also been made to impose a minimum tax on the income of foreign subsidiaries of US companies from “intangible” assets – patents, trademarks, the things that power the knowledge economy – known as “low global intangible tax income” or GILTI. The idea was to remove the incentive to move profits from the US to low-tax areas overseas.
Now the Biden administration wants to go further by increasing the US corporate rate from 21% to 28% and the rate for American companies abroad from 10.5% to at least 21%. If Washington can get most of the major economies to hit a global minimum rate close to its own overseas rate, it could undermine the main political argument against corporate tax hikes – that they send investors to the closest low-tax areas.
“The GILTI rule really did nothing to bring US tax rules into line with the rest of the world and appears to have hurt US competitiveness,” said Robert Korne, tax attorney at Spiegel Sohmer in Montreal. “Aside from the recent high-tax kickout regulation, in many cases it didn’t generate much revenue when foreign tax credits were taken into account.
“If the US is the only country to increase its corporate tax rate now, it will place US-based multinational corporations at a greater financial disadvantage.
“That is why the Biden administration needs the world with a minimum sentence by its side. And this is where the question of which countries are allowed to tax what and where comes into play. “
The negotiations on global corporate taxation brokered by the OECD are divided into two political “pillars” – a global minimum rate and a global sharing of tax rights on revenues of companies in countries where they have no physical presence (which is the case for digital giants ) like facebook is pretty much everywhere).
It’s safe to say that the US is far more enthusiastic about the first pillar than the second – and the tariff threat to nations introducing summer times is not entirely off the table. But without getting Americans to agree to share the wealth generated by American corporations overseas, it’s hard to see international consensus building on a significant global minimum.
“It’s easy to draw an analogy of how the euro works,” said Patrick Marley, a partner in tax law at Osler. “A common currency does not mean that countries want the same from it. Some EU countries benefit when the euro is trading at a higher value, others better when it is trading lower.
“Tax policy is similar – there are winners and losers. When every country has exactly the same corporate tax rate, the United States is the big winner because of its market size and natural corporate synergies. “
While Treasury Secretary Chrystia Freeland has been talking brightly about the concept of a global minimum rate, it is worth asking whether Canada would be willing to abandon its daylight saving time without getting great consideration through a global tax law deal.
“It’s hard to say what Canada’s interest in it is other than consensus for consensus sake,” Marley said. “It’s not at all clear that this would be good for us.”
The tension over tax laws, coupled with the desire of low-tax areas like Ireland to maintain their competitive advantage, makes the prospect of a global tax rate of nearly 21% seem like a long-term prospect.
“If you could reach an agreement on a global minimum of, for example, 12%, it would not have much impact – only a few low and non-tax areas might be affected,” said Korne. “But in order to get an agreement at a more meaningful price, other countries will want a piece.
“In other words, everyone has to come together. The different summer times only make it more complicated. But if you just give the US what they want, it won’t be at the table when the time to talk about what you want. “
Doug Beazley is a regular contributor in Ottawa.