Corporate Tax

The possibilities for a world corporate tax deal enhance as Yellen indicators her Memorandum of Understanding

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US Treasury Secretary Janet Yellen.

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The French and German finance ministers did not hide their joy after US Treasury Secretary Janet Yellen this week signaled her approval of the principle of a global minimum corporate tax rate.

With the US government embracing a principle long debated in the Organization for Economic Co-operation and Development, the prospects for a global corporate tax avoidance deal have improved. The chances of limiting the race to the bottom as governments try to attract companies with low tax rates have improved. And multinational corporations that have been adept at paying little tax on their global profits are likely to be asked to contribute more.

Both the French Finance Minister Bruno Le Maire and his German counterpart Olaf Scholz expressed the hope that an international agreement on these lengthy issues could be reached this year. Both also insisted on a dimension of the OECD’s plans that has become delicate in transatlantic relations: taxing large (and mostly US) global internet companies that have become experts in shifting their profits from overseas to the jurisdictions in which they pay little, if any, taxes.

The lack of such a global deal and the Trump administration’s decision to back out of talks last year prompted most of the major EU countries to threaten or adopt a so-called digital tax based on the revenues of companies like this one

Apple,

Amazon,

Google

or

Facebook

in their own jurisdictions. All of them have been designed as temporary until the still elusive OECD deal is finalized.

However, the plan discussed in the OECD is much broader. Technically, the system is ready after more than a year of discussions between around 135 member countries. It has two “pillars”. The first suggests changes to the way MNEs are taxed – part of which depends on where their actual customers are. The second pillar defines the principles on which a minimum tax rate should be based.

The OECD announced its plan last October, and now it just needs to move to the political level, with a binding agreement between the governments involved in the talks. That was the meaning of Yellen’s statement on Monday. After years of skepticism or contempt in the OECD talks, the US is now advocating the multinational approach.

Washington had already rejoined the talks on the taxation of multinational corporations. And with the Biden administration’s plan to increase U.S. corporate tax from 21% to 28% over the years, the U.S. now has a vested interest in ensuring it doesn’t fall victim to tax dumping again.

According to the OECD, implementing its first pillar would cut tax revenues for governments around the world by around $ 100 billion. The second pillar would add $ 60 to $ 100 billion to global corporate tax revenues.

However, France and Germany may be a little optimistic if they hope for a deal this year, even when the technical work is done and the political stars align.

Even if dozens of participants agree – a necessity to avoid large tax havens lingering – ratification of the treaty may take some time. In the US, voting in Congress may not go smoothly.

However, the lack of an agreement, according to the international organization, should weigh governments’ decisions on whether to act now or not. Disorganized initiatives increase the likelihood of a global tax and trade war. This is not a distant prospect: the US is still levying tariffs on some goods imported from France, for example because of that country’s own digital tax.

Without an agreement, trade and tax disputes could lead to a 1% decline in global gross domestic product, according to the OECD. With the global economy slowly recovering from the Covid-19 recession, this is a risk to think about.

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