Setting a global minimum corporate tax rate among the major industrialized nations has the charm of being simple. However, it raises many questions about whether offshore centers will allow companies to bypass the process, as well as a minimum rate regime that undermines the freedom of nations to set their own rates.
ZEDRA, the business services, funds and wealth services company, has weighed on the transatlantic debate over US President Joe Biden’s desire for a minimum global level of corporate taxation.
Biden, supported by a democratic majority in the House of Representatives and the Senate, wants to create a floor below which the corporate tax rates of the countries cannot fall. Under the previous Trump administration, the US rate was cut from 35 percent to 21 percent. Previously, the US had one of the highest such rates in the world. This was partly due to the fact that many US multinational corporations were putting some of their overseas revenues overseas rather than repaying them.
Last week the US agreed to accept a minimum rate of 15 percent versus the previous target of 21 percent. France, Germany and Italy have since stated that this level was a good basis for securing an international agreement through July. An agreement could be agreed by the group of seven countries as early as June.
However, media reports have said the UK is not interested in playing ball.
“There is no doubt that the UK wants a more effective tax system – after all, it is one of the few countries to have put in place tax policies on digital services while the OECD is fighting broader reforms – but its party line is that Biden’s plan still has many flaws exhibits its ability to better tax tech giants by focusing on where profits are captured and where their value is created, ”Adam Dunnett, director at ZEDRA, said in a note.
“In recent weeks, Biden’s proposal for a minimum corporate tax rate has received increasing international support. It has been cited as the best opportunity for a generation to curb corporate tax abuse, so it’s no wonder we are seeing strong engagement from people like Germany, France, Canada, Italy and Japan, ”he wrote.
“The UK has expressed the need for a more detailed account of the proposal and sources closer to Parliament have indicated that behind the scenes there are other motives at play. These affect the UK’s responsibility for some of the UK-owned tax havens around the world. Britain wants to continue to undercut its competition going forward, and the Conservative party has just proposed a corporate tax hike in 2023 to meet record levels of loans and needs [for] that extra tax revenue, ”Dunnett continued.
Some countries within the EU, for example (Luxembourg, Ireland and Malta), have low single-digit rates. Biden and like-minded politicians want to limit the scope for such “tax competition”. On the other hand, critics argue that tax rates should be a matter for individual countries and their constituents. After all, the United Kingdom voted to leave the European Union partly out of a desire to make Parliament responsible for taxes again instead of “harmonizing” tax rates across national borders.
Corporate taxes, which ultimately fall on people’s shoulders in different ways (shareholders, employees, etc.) have long been criticized for promoting the finagling of tax codes in different jurisdictions.
Commentators have also argued that tax competition has undermined tax rates, which limits governments’ ability to levy taxes on their spending plans. On the other hand, defenders of such a competition like Daniel Mitchell, Senior Fellow of the think tank CATO Institute, argue that this encourages governments to limit taxes beyond what would otherwise be the case. Mitchell has suggested that such efforts to curb disparity in tax rates are tantamount to creating a tax cartel.
“Countries with good tax systems will have no interest in joining Biden’s global tax cartel. Instead, they will maintain their better tax systems and benefit from increased jobs and investment as the United States becomes less competitive, ”wrote Mitchell in an editorial May 20 (Los Angeles Daily News).
Corporate tax rates have dropped roughly in half since the early 1980s, as shown in this graph from the April 7, 2021 publication of the Atlantic Council. (The table refers to figures from the tax foundation.)