The Biden administration has proven resourceful and brave in many ways. However, from the perspective of the leading partners, few proposals are more important than those for a global minimum effective corporate tax rate. This should pave the way for solving a number of problems that are both important and technically complex. Your partners should urgently take this opportunity to agree on reform.
In a world of multinationals, mobile capital, and seamless digital transactions, corporate taxation poses at least three major challenges. First, it’s too easy for modern businesses to move large chunks of their profits to tax havens like Bermuda or the Cayman Islands, or to low-tax areas like Ireland. Second, countries are in a “race to the bottom” over corporate taxation, from which they ultimately lose. After all, it is difficult to identify where modern companies with large intangible capital, especially digital companies, locate their activities. This leads to a proper charging of the other two problems.
As these challenges became more apparent, the OECD encouraged analysis and discussion of what it termed “soil erosion and profit shifting”. These discussions ultimately centered on two “pillars” of each resolution: “pillar one” focuses on the distribution of profits and “pillar two” on the need for a global minimum rate.
Until the election of the Biden government, however, no agreement could be reached. One difficulty related to the first pillar has been the desire by the UK, France and others to tax the digital giants operating in their economies but to pay virtually no corporate tax, even if domestic competitors do. Another aspect related to the second pillar was to agree on a minimum tax rate.
The US proposal is leading the world to solutions in part, but not entirely.
It offers a minimum tax rate. The US initially proposed a quota of 21 percent. But it has already reduced this to a far less onerous 15 percent. This is a significant concession as the government wants to increase the U.S. headline rate to 28 percent. The government is unlikely to make further concessions as the greater the gap between the agreed minimum rate and US domestic rates, the greater the risks of a new race to the bottom.
It also provides only part of a solution to the desire to tax digital businesses, which is important to Rishi Sunak, the UK Chancellor of the Exchequer. Sunak isn’t just interested in collecting more taxes from UK based companies. He also wants to tax the global digital giants who do business there, reflecting a wider push to tax local sales locally. Washington insists that it cannot accept discrimination against US companies and that no tax system should be specific to any particular sector.
The US proposal is therefore to focus on the 100 largest multinationals. This could bring in about as much money as it would be considered for a lot more. It would also focus on the companies that benefit most from global markets, are most involved in intangible activities, and are best equipped to handle the complex cross-border distribution of profits.
No system of global corporate taxation can be perfect, partly because the problems are complex and partly because the interests of the countries conflict. But the US proposals have now left room for a compromise that would solve today’s major challenges by stopping the misuse of tax havens, stopping the race to the bottom and preventing large corporations from operating freely in a country’s markets without paying taxes. This is a good place to start. It is now important to reach a satisfactory agreement.