President Joe Biden wants to raise taxes on companies. Part of its success could depend on the rest of the world going along with it, or at least trying.
It’s no secret that companies would rather not pay taxes – and that they employ a variety of tricks and schemes domestically and internationally to keep their tax burdens low. Over the past 35 years, the average corporate tax rate has more than halved worldwide, falling from 49 percent in 1985 to 23 percent in 2019. Despite efforts to improve the international tax system, including the 2017 presidential tax bill Donald Trump, businesses are still finding a variety of workarounds. This includes profit shifting, in which companies book profits from countries with higher taxes in countries with lower taxes in order to reduce their tax burdens. Profit shifting American and foreign multinational corporations cost the US tens of billions of dollars annually because they are not deterred from seeking tax havens in places like Bermuda, the Cayman Islands, Ireland and Singapore.
The White House and some Senate Democrats are calling for a revision of the U.S. tax law’s approach to international taxation and seeking to further reduce profit shifting, including increasing the minimum tax on profits of American companies overseas from 10.5 percent to 21 percent. Biden is also aiming to increase the US corporate tax rate from 21 percent to 28 percent. His administration appears to be aware that one element that would facilitate their efforts, or at least alleviate concerns about US competitiveness and the effective enforcement of its tax rates, would be the participation of the international community.
For this reason, the US is also advocating the idea of a global minimum tax for countries to be introduced worldwide. The hope is that it will deter countries from lowering their tax rates in order to lure investment and business into what many economists and politicians call an ongoing “race to the bottom”.
“Together we can use a global minimum tax to ensure that the world economy thrives on a level playing field in the taxation of multinational corporations, promoting innovation, growth and prosperity,” Treasury Secretary Janet Yellen said in an April speech.
“The US government is serious, many European governments are serious, but with anything that is multilateral there are still risks and hurdles ahead of us.”
Yellen leads America’s mandate with the Organization for Economic Co-operation and Development (OECD), an international business organization, and the Group of 20 (G20) to set a global minimum tax for multiple countries. The idea has been gaining importance within the OECD for some time, although it is still a long way from being completed. The rate is likely to be a sticking point (some countries would prefer a much lower minimum than others), and even if the OECD does reach an agreement, it is non-binding – individual countries would then have to find out if they should adopt it. Still, there is progress.
“I think there’s a much better chance now that the US will be behind it,” said Craig Hillier, director of international tax services at Ernst & Young Americas. “The US government is serious, many European governments are serious, but with anything that is multilateral there are still risks and hurdles ahead of us.”
The US can try to curb tax haven abuse, but only up to a point
The US can take steps to ensure that its multinationals pay their fair share of taxes, and efforts have increased in recent years, with varying degrees of success. “Regardless of international coordination, I think the US can tighten its rules against abuse of tax havens,” said Seth Hanlon, senior fellow at the Center for American Progress.
The Tax Cut and Employment Act of 2017, which was largely favorable to corporations, including multinational corporations, contained some provisions aimed at trying to make international profits. The global low intangible tax income rate (GILTI) of 10.5 percent was introduced to serve as the minimum tax on offshore profits. And attempts have been made to curb the practice of US companies paying high interest and royalties to foreign subsidiaries in an attempt to lower their US tax burdens.
“Multinational Corporations Still Shift Hundreds of Billions in Profits Abroad Every Year”
But those provisions have not worked as well: As Chye-Ching Huang, executive director of the Tax Law Center at NYU Law, stated in a recent testimony to the US Senate, “Their design undermines their effectiveness and maintains incentives to localize or under-profit to invest overseas in certain circumstances and to increase these incentives in other cases. “Substantial profits were left out of the reach of the law, and companies were still finding ways to balance income and taxes to avoid the minimum, among other things.
“By moving their profits to Bermuda and the Caymans, they can bring the foreign average down to the GILTI rate and so profits are still flowing into tax havens despite the minimum tax,” Hanlon said.
Huang was factual in her testimony: “Multinational corporations still shift hundreds of billions in profits to sea each year.”
Under Biden, the White House has put forward plans to revise parts of the tax legislation introduced in 2017, including the GILTI regime. Among other things, the tax rate would be calculated on a country basis so that companies would not be able to try to calculate their German tax burden with the Swiss one, and the minimum tax rate would be increased to 21 percent. Sens. Ron Wyden (D-OR), Sherrod Brown (D-OH) and Mark Warner (D-VA) have also published a proposal on international taxation aimed at tightening the US Code, including correcting some of the perceived errors in the EU 2017 bill.
Still, there are concerns that if the US tightens the rules and doesn’t go along with other countries, it will get on my nerves. “The concern is that if the US has a minimum tax and nobody in the world has a minimum tax, there is a disadvantage to being a US company versus a company headquartered in another country,” said Hillier. “It is for this reason that the Biden administration has now emphasized its strong support for a global minimum tax.”
The Biden government wants to include the rest of the world in its tax plan
A global minimum tax is basically what it sounds like: it would set a minimum tax rate on profits regardless of where they come from. Reuters has a good explanation here.
When US negotiators at the OECD under the Obama administration brought up the idea of the global minimum tax, they said they were basically “laughed out of the room”. But the times have changed. Discussions within the OECD on a global minimum tax as part of wider negotiations on cross-border tax rules are advancing, and while broad agreement has not yet been reached on all issues – the US has been the problem on some issues – it is hoped that consensus will be reached on Visibility is until the middle of the year.
Of course, the OECD is not a legislative body. All it can do is make recommendations. So if there were to be an agreement on a global minimum tax, it would be up to the countries to implement it. That would take time and cannot be taken for granted. “There is a risk that other countries will not implement it. The other is that they are likely not going to put the same system in place as the US, they are going to do something different and it will still be cheaper, “said Hillier. The hope is, however, that if enough countries set up something, it would be enough to make a difference, especially those that host large multinational corporations.
The problem of the race to the bottom has become more and more evident. As Jeff Stein pointed out in the Washington Post, 76 countries lowered corporate taxes between 2000 and 2018, while only 12 kept them the same and six raised them. Today fewer than 20 countries have corporate tax rates in excess of 30 percent, compared to more than double that figure at the turn of the century.
76 countries lowered corporate taxes between 2000 and 2018
There are some questions about whether a global minimum tax is a good idea, Hillier noted. “It’s a question of, is tax competition a bad thing?” he said. Or should the US be able to tax what Ireland is doing? He added that tax havens also see themselves as an important role in the global economy.
While the US and other high-tax countries may prefer a higher global minimum tax than, for example, countries where the corporate tax rate is lower, something may be better than nothing. And as Jordan Weissmann points out at Slate, some countries that take action could already make a difference: 10 countries have their headquarters, about 80 percent of the multinational profits.
The US can respond to taxes without getting the international community to obey, and there is debate over how that would play out. Senator Pat Toomey (R-PA) has warned he believes a global minimum tax will fail, arguing that the government’s request confirms that Biden’s proposed increase in corporate tax from 21 percent to 28 percent will hurt US competitiveness becomes. “’Race to the Bottom’ is the way the Biden government describes competition between developed countries to arrive at tax legislation that attracts investment and maximizes growth. It is a race that we should be leading and that we don’t want to prevent, ”he said in a statement in April.
Others say the competitiveness argument doesn’t hold as much water as numbers like Toomey would like. After all, the US corporate tax rate before the 2017 tax return was 35 percent.
“Competitiveness concerns of US multinational corporations are ignoring the evidence,” said Kimberly Clausing, assistant secretary of tax research for the Treasury Department, in the Senate in March. “Both before and after the 2017 Tax Act, US multinational corporations are the envy of the world, not just for their high profits and market capitalization, but also for their tax planning acumen. US multinational corporations paid similar effective tax rates to their peers in other countries even before the 2017 Tax Act drastically lowered US corporate tax rates. “
For now, at least, the Biden government’s plan appears to be trying to involve other countries in their attempt to further lower corporate taxes and make them more attractive. “Competitiveness is about more than how US-based companies hold up against other companies in global merger and acquisition bids,” Yellen said in March. “The point is to ensure that governments have stable tax systems that generate sufficient income to invest in essential public goods and respond to crises, and that all citizens share the burden of funding the government fairly.”