Corporate Tax

Does a worldwide minimal corporate tax work?

A global minimum corporate tax rate of 15%, which the G7 countries have approved, requires coordination between countries to ensure that they apply it consistently and do not work against each other, according to Wharton experts. On June 5, after two days of talks in London, the G7 finance ministers agreed on “reforms that will allow multinational corporations to pay their fair share of taxes in the countries where they do business”. The plan is to tax companies regardless of where they are based.

The G7, made up of the seven largest industrialized nations, said their “seismic agreement on global tax reform” was necessary to prevent multinational corporations from evading taxes by settling in tax havens. The G7 members will also support an additional tax for the largest and most profitable companies in the world. That may target tech companies like Google, Amazon, and Facebook, requiring them to pay taxes wherever they sell their services, a New York Times report said. To be effective, the G7 proposals must win the support of the broader group of 20 nations at their July and October meetings, and the 139 countries of the Inclusive Framework of the OECD must join.

The global minimum tax rate of 15% is “conceptually a good idea, [where] ‘Bad apples’ are likely to have to pay a little more tax than they currently pay, “Wharton’s accounting professor Jennifer Blouin said on the Wharton Business Daily radio program, which airs on SiriusXM. (Listen to the podcast above.)

The price of uncertainty

“But what is going to hang people up is, how would we do it when it comes to actually paying the tax?” Said Bloin. Second, how can we stop other countries from undermining it after we put this minimum tax in place? It has to be coordinated. If not all players sign up and agree to centralized management of the process, it will fall apart. “

“If not all players sign up and agree to centralized management of the process, it will fall apart.” –Jennifer Blouin

“Different countries should develop tax policies and then stick to them,” Wayne Guay, Wharton’s accounting professor, told Knowledge @ Wharton in a separate interview. “Worse than tax rates that are too high, too low, or too playable are just tax rates that are constantly changing.” He noted that the US “changed the tax landscape dramatically in early 2018” after the 2017 Tax Cuts and Jobs Act reduced the corporate tax rate from 35% to 21%. “Corporations have stalled various types of investment that led to this new tax plan and have been struggling ever since to restructure their global operations.”

The uncertainty about the ultimate outcome of the G7 proposal will lead to similar disruptions, Guay warned. “The G7 seems determined to revise global taxes again, and no doubt companies will again put the brakes on various types of investment until they are more certain of what the new tax landscape will look like,” he said. “Uncertainty is one of the biggest problems companies face and one of the biggest barriers to operational efficiency.”

There are already cracks in the G7 plan. Blouin pointed out that Switzerland intends to offer subsidies to companies to offset the 15% tax; it is home to MNCs such as Nestle, Novartis and Roche. Ireland has a corporate tax rate of 12.5% ​​and is one of the countries whose approval is required for the G7 tax plan to go into effect. However, Ireland wants to keep its tax rate to offset the handicap a small country has in attracting foreign investment, according to a report in the Wall Street Journal.

The Biden government has welcomed the G7 proposal, which is in line with the earlier proposal by the Treasury Department in the context of the OECD and G20 tax negotiations. Treasury Secretary Janet Yellen said in a statement that a global minimum corporate tax “would end the race to the bottom in corporate taxation”.

According to a Treasury Department report on Biden’s “Made in America” tax plan, seven of the top ten locations for US multinational profits in 2018 were tax havens. “Bermuda, a country of just 64,000 people, has 10% of all reported US multinational foreign profits,” it noted. British overseas territories such as Bermuda, the Cayman Islands and the British Virgin Islands were among the top tax havens, according to a Guardian article that cited a report by the Tax Justice Network campaign group.

If the G7 proposal becomes a reality, many tax havens that are now offering lower tax rates will clearly be losers. Among those losers, Ireland will stand out because it has used its low tax rate to attract tech companies, call centers and the like, Blouin said. Others include the Netherlands and the UK, both of which offer a low tax rate on real estate income or income from intellectual property development, she noted. “So this minimum tax essentially undermines all of these types of investment incentives,” she added.

Different strokes at Big Tech

The G7 proposal will affect technology companies that sell services like Amazon, Facebook and Google differently than Apple and Microsoft that sell hardware and software packages, Blouin noted. “It’s interesting who we’ve heard from, but it’s also interesting who we haven’t heard from,” she said. Amazon, Facebook and Google all welcomed the G7 proposal, “but I don’t think we’ve heard of Apple or Microsoft,” she added. On the eve of the June G7 meeting, The Guardian announced that Microsoft’s Irish subsidiary, which is based in Bermuda for tax purposes, paid almost no tax on profits of $ 315 billion in 2020.

“Worse than tax rates that are too high, too low or too playable are only tax rates that are constantly changing.” –Wayne Guay

Amazon, Google and Facebook like the G7 proposal because it contains a provision to abolish a “digital services tax” in the European Union and elsewhere that is not levied on profits but on selected sources of gross income. “They like the reassurance of paying a minimum profit tax rather than a tax on their gross income,” said Blouin.

The US companies facing the digital services tax are supported by the US government. The Trump administration had called the tax “unfair” and retaliated with a Section 301 investigation that included 10 countries. The US Trade Representative recommended trade tariffs against six of these countries in March, but suspended these measures for 180 days in June to make way for multilateral tax negotiations in the OECD and G20 countries.

Disconnections within the US guidelines

The US has to grapple with the inconsistency between the G7 proposal and its so-called GILTI tax, or a minimum tax on global intangible low-taxed income, which is the income generated overseas by US-controlled foreign companies. To prevent U.S. companies from relocating their intangible assets and related profits to countries below the federal corporate tax rate of 21%, the Tax Cuts and Jobs Act 2017 had the GILTI tax rate in a range between 10.5% and 13.125% fixed. . “[The GILTI tax] won’t work the same way [as the G7 proposal]and Washington will have to admit it, ”said Blouin.

In recent testimony in the Senate, the Democrats called for the GILTI tax rate to be raised to 21%. The Biden government also wants a GILTI tax rate of 21% or taxes on foreign profits of US companies and a tax rate of 28% on domestic profits, as proposed in the American Jobs Plan. “We are going to have to admit some problems and it will be interesting to see if we do when we finally pass the legislation,” said Blouin.

According to Blouin, if the G7 minimum tax results in a “big increase in revenue” for the US, the Biden administration may not see a need to push ahead with its plan to increase corporate taxes to 28%, Blouin said. “If [the G7 minimum tax] will probably increase some revenue, then we might consider increasing the corporate tax rate to a more reasonable level, namely 24% or 25%, ”she said. “Then we’ll probably get some legislation in place in the next 12 months or so.”

The Treasury Department’s report, quoted above, estimates additional tax revenue of $ 500 billion.

The US would also have to come to terms with not being responsible for the implementation of the G7 minimum tax proposal. “The US has always been at the forefront of setting tax policy, and [other] Countries looked to us to lead the process, ”said Blouin. “This would probably be the first time you toss your hat to a group where you are not currently running the show.”

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