U.The President of the United States, Joe Biden, has announced his intention to spend big. After adding a $ 1.9 trillion stimulus package announced by the Donald Trump administration, he unveiled a huge $ 2 trillion infrastructure spending package spanning eight years to help the U.S. Revitalize the economy and restore competitiveness. There will likely be another plan to invest $ 1 trillion in childcare, healthcare, and education.
To make it clear that the plan is not mere rhetoric, the government is proposing to fund the total planned investment of $ 3 trillion or more with an increase in the U.S. corporate tax rate from 21 to 28 percent and set a global minimum corporate tax of 21 Percent and still to be canceled increases in income and capital gains taxes as well as the estate taxes imposed on the rich. In this way, Biden expects to unite the Democrats and take their more progressive parts with him as he enters the tough negotiations with the Republicans to gain support for the ambitious agenda.
The proposed increase in the domestic corporate rate is not as hefty as it looks. The tax cuts decided by Trump are only partially reversed, so that the tax rate is well below the 35 percent touched under Barack Obama. In addition, the increase is to be phased out over a period of 15 years, with expenditure being financed by borrowing in the meantime. Big business in the US, however, is prepared for the fight and declares the tax hike proposal “dangerously misguided”. However, there is widespread resentment that even in the worst of times big companies can make big profits and pay little or no taxes. With the necessary support from the population, the proposals can certainly be implemented.
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Opponents of the corporate tax hike argue that doing so would weaken US companies compared to competitors based in countries with much lower tax rates and encourage them to move to other tax havens. The Infrastructure Finance Plan also addresses this problem by supporting a global minimum corporate tax rate to be set at 21 percent. This corresponds to a doubling of the minimum tax rate for foreign profits of US companies of 10.5 percent. If the rate is less than 21 percent in a place where a multinational company is initially making profits, the government of a country where that multinational company is headquartered can levy taxes to cover the difference.
Global minimum corporate tax
Treasury Secretary Janet Yellen wasted no time in calling on other countries to support the proposal for a global minimum corporate tax rate. Speaking to the Chicago Council on Global Affairs, she reportedly said, “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 and growth and prosperity. “This is a change in the attitude of the US, which in the past has wanted to leave the choice of tax jurisdiction to multinational corporations.
Given the US, the proposal for a global minimum tax for transnational corporations is likely to find broad support, though not necessarily at 21 percent. This is all the more true as discussions were held between 135 countries that were involved in the Organization for Economic Cooperation and Development (OECD) integrative process on soil erosion and profit shifting that companies would have to pay taxes in the countries in which they operate than shifting profits to tax havens and paying little or negligible taxes.
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The OECD Secretariat has prepared a blueprint for how this can be done and the idea is to reach an agreement sometime this year. This would mean that all countries that contribute to transnational revenue, and not just the country where the parent company’s headquarters are located, would benefit from and participate in the taxes imposed on technology giants and other multinational corporations many of which are from the US A “global” minimum corporate tax rate is considered a compromise and takes this option into account to ensure that higher tax rates in their jurisdiction do not result in further relocation of US companies to low-tax overseas locations.
If global consensus is reached, along with Starbucks, LMVH and Mercedes Benz, companies like Apple, Google, Amazon and Facebook will also be forced to hand over some of their surpluses as corporate income tax to governments in countries where and where they operate operate where they are headquartered. In the past, companies like these have shifted profits to tax havens. It was estimated that US multinational corporations had increased the percentage of foreign profits reported as earned in tax havens from less than a tenth in the 1960s to more than 50 percent in 2018. This included not only locations like the Cayman Islands and British Virgin Islands, but also Ireland and the Netherlands, which saw some advantage in getting companies to channel their profits through their jurisdictions in exchange for low revenues from more lenient taxes. For example, to attract interested companies, Ireland lowered its corporate tax rate over a five-year period up to 2003 from 32 percent to 12.5 percent.
Shrinking tax base
As a consequence of this competition, of course, there is a race to the bottom, which in a world where multinational corporations increasingly represent an overwhelming share of revenue and profits, means that governments are faced with a shrinking tax base. Combine that with a general trend toward lower taxes, which The Economist says is translating into a decline in average global corporate tax rates from 40 percent in 1980 to 24 percent in 2020 and a strong trace of fiscal conservatism leading to a sharp drop in the Government spending. This meant less growth in the years of globalization when these tendencies manifested. But now the US government under Biden sees the cut in spending as the reason for the US’s loss of competitiveness compared to emerging rival China, which has had extremely high investment rates for decades. On the agenda is a drastic increase in government spending, which requires higher tax revenues and a global tax pact.
Taxes on digital services
However, reaching global agreement is unlikely to be easy. This is reflected, for example, in the US position on taxes on digital services (DSTs). In late March 2021, the U.S. Trade Representative (USTR) offices, under the supervision of the Biden government, published a series of reports of Section 301 summer time investigations imposed by a number of trading partners (Austria, India, Italy, Spain, Turkey) and the United Kingdom), which were found to be eligible for trade measures because their daylight saving time “discriminated against US digital companies, was inconsistent with international taxation and burdens US companies”.
CTR Katherine Tai, a Biden-appointed person, stated: “The United States continues to seek international consensus on international tax issues through the OECD process. However, until such a consensus is reached, we will maintain our options under the Section 301 process, including introducing tariffs where appropriate. “
India’s taxes on digital services make it clear what this is about. In 2016 India introduced a 6 percent countervailing charge on payments for online advertising services to non-resident agents. In 2020, the scope of the levy was expanded to include payments to non-resident e-commerce operators, the income from the provision of e-commerce services such as digital platform services, sales of digital content and data-related services and the tax rate are fixed at 2 percent.
The basic idea of the levy is that digital commerce enables non-resident companies to provide services to and earn income from India residents without having a physical presence in the country. Therefore, they would not post any income or profits here. This deprives the Indian government of the tax revenue it would otherwise derive from such activities that daylight saving time has been imposed instead. The OECD International Tax Scheme recognizes that countries where customers are located remotely by multinational corporations that generate large revenues and profits were entitled to a portion of the income from taxing such profits. The blueprint therefore provides for part of these profits to be allocated to countries that can benefit from the taxes that are levied on these profits. If the US wants its proposal for a global minimum corporate tax to be implemented, it would have to accept a version of that proposal.
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Given this, and the fact that the countervailing charge has been in place for some time, it would have been better for the USTR to accuse India and its other trading partners who use daylight savings of having violated the principles of international transactions. Instead, declaring that the US would maintain its options under the Section 301 process and threaten to impose tariffs is sending conflicting signals about the willingness of the US government to work together to shape a global tax architecture to broadly support it to promote its own ambitions to restore the economic competitiveness and dominance of the USA.