T.The end of the main street has been explained many times. The Covid crisis has certainly hit hard, but even before local businesses had struggled with the pandemic, they tried to compete with companies like Amazon and Starbucks who pay minimal taxes despite large sales. In this regard, the US proposal to set a global minimum tax rate and allow some of its companies to be taxed based on where they do their sales is a step in the right direction.
Crises create economic hardship and the impetus for change. At the height of World War II, the Beveridge Report laid the foundation for the British welfare state. As we fight a new enemy, the call on both sides of the Atlantic has been to “better build back” after the crisis.
But crises also often create the means to pay for changes. What is less remembered from WWII is the introduction of the “purchase tax” (the forerunner of modern VAT) and the PAYE system for paying income tax. This income tax was first introduced in Britain itself to pay for the Napoleonic Wars. The development of new tax technologies, forged in the heat of the crisis, has been central to the functioning of modern states. The desperate need for income focuses the mind and helps overcome previous political opposition.
The tax reform for this crisis is the taxation of multinational corporations. Public anger over the low tax rates being paid by some companies has been fueled by the feeling that some of them have made surge profits from the pandemic. These companies currently keep their tax burdens low by “booking” their profits in low-tax countries. Sometimes it can be difficult to determine where to post those profits. Are Google’s profits made in the US, where the company is headquartered? in the countries of residence of its users; the countries of the advertisers; or Bermuda, where it posted a profit of $ 23 billion in 2017? So far, the answer has largely been wherever Google says it was made.
This practice has a high cost. First and foremost, an estimated 15-20% of corporate tax revenue in Europe is lost to such profit shifting each year (in the UK this is around 10% of annual NHS spending). Second, it gives multinationals an unfair advantage over companies that do not and cannot do international business. Global companies can transfer profits to areas where the tax rate is low. Your local cafe doesn’t have this option.
Enter Janet Yellen, Joe Biden’s Treasury Secretary, and the person responsible for finding a way to pay for his ambitious projects. Their plan is as follows: Make sure that all multinationals pay a minimum tax rate on their profits – 21% – regardless of where they are posted. If they posted profits in a country that has a lower tax rate, they owe an additional tax to the country where they are headquartered.
This plan, while simple, is revolutionary. It has the potential to increase tax revenue significantly. It stops the race to the bottom observed over the past few decades as countries compete to attract multinational corporations by offering ever lower tax rates – bad news for tax havens like Bermuda, good news for the rest of us. If countries want to compete to attract multinational companies, it has to be about the quality of the infrastructure or the training of the workforce – things that citizens also value. US support means this can actually happen.
Much remains to be agreed – expect the level of the minimum tax rate to be hotly contested – but this is an important first step and the UK needs to get on board quickly. The digital services tax may have been a good idea as early as early 2020 when the U.S. president was unwilling to collaborate and the prospect of meager revenue from Amazon was sufficient. However, international cooperation is required for a fair and sustainable corporate profit taxation system. The US and EU lead the way, which means the UK risks having to abide by the rules it adopts unless it takes its place at the table now. Once that is cleared, they can even begin the other tax revolution the 21st century needs: taxing the similarly mobile wealth and incomes of super-rich individuals.