Corporate Tax

The proposal for a world minimal corporate revenue tax within the US is selecting up steam

Germany and France welcomed the Biden government’s new approval of a minimum corporate tax rate of just 15%, which may pave the way for a global deal as early as July that could change the way international companies are taxed.

The Treasury’s new position, announced Thursday, requires companies to pay a minimum tax rate of 15% on their overseas profits, which is below the 21% it has been aiming for on U.S. corporations’ overseas revenue.

At a meeting of the finance ministers of the European Union on Thursday, Germany and France were enthusiastic about the plan. The two governments supported the higher rate but indicated that the lower rate would find wider support in smaller countries.

“This is really a big step forward,” said Federal Finance Minister Olaf Scholz. “I am now very happy that we have the chance that this deal, which we have been working on for so long, can take place in the summer.”

“We can live with 15%,” said his French counterpart Bruno Le Maire.

However, it is not yet clear whether the move will win small economies that have used low taxes to attract foreign investment, including Ireland. The country has become the European base for many large US tech companies, whose efforts to limit their tax burdens have led to the proposed revision of the global rules. Challenges await domestically as the Biden government tries to get its plan through Congress.

Some European officials now believe it is possible that the CFOs of the Group of Top 20 Economies could reach an agreement on the principles underlying the new rules at their meeting in Italy in early July.

At stake is whether some of the world’s largest economies can avoid a trade war over whether and how the profits of some of the world’s largest tech companies are taxed. Several countries, including France, the UK, and Italy, have introduced technology-specific taxes. The US has threatened tariffs if taxes are not lifted, but countries have announced they will not do so until a general agreement is reached.

Two intertwined international tax talks are currently underway.

One focuses on where corporate income should be taxed, with big European countries saying that big companies, especially US tech giants, pay too little tax in the countries where they sell to consumers. The second track concerns the talks about a global minimum tax. Both tracks are carried out by the Organization for Economic Cooperation and Development.

Big tech companies argue that they need tax security security, not a patchwork of national taxes – and some privately accept that a global deal can mean an increase in their tax bills. You support the OECD talks.

Ireland is one of the countries that opposed the early US proposal for a minimum tax rate.

“I believe that small countries, and Ireland is one of them, must be able to use taxation policies as a legitimate lever to better compensate for size, location, resource, industrial advantage, and real, material and lasting advantage Countries, ”said Irish Finance Minister Paschal Donohoe in a speech in April.

Ireland’s tax rate is 12.5%, not far below the Treasury’s proposed new minimum rate.

Michael Graetz, professor of tax law at Columbia University, said he had long believed the Irish tax rate was the global minimum.

“There is now a gap between the Irish upper limit and the US lower limit of 15 and the question is which way it is going,” he said. “But 21 was always unrealistic.”

Big countries say the tax competition that Ireland advocates is a race to the bottom that robs them of the resources they need to invest and recover from the Covid-19 pandemic. If enough large countries buy in, they can use their combined economic clout to enforce a minimum tax by restricting deductions by companies from countries with no minimum taxes.

The Biden administration has included such a proposal – called the Shield – in its corporate tax plan that Congress should consider. With so many companies doing business in the U.S., the shield poses a threat: join the international minimum tax treaty or we’ll take your revenue.

But the level of a minimum rate – and the tax base to which that rate would apply – are not the only issues that need to be addressed. France, the UK and a number of other countries are more interested in ensuring that corporate income tax rights are redistributed in order to give them increased revenue from the digital giants whose presence in their economies has grown even larger during the pandemic.

The Biden government’s announcement of the 15% lower limit dispels confusion among some countries about whether the US would stick to a minimum of 21%, said Manal Corwin, a former tax officer who is now with KPMG LLP.

The government must bring all tax changes through Congress, where the Democrats have narrow majorities. The government advocates a 21% rate on US corporate foreign income and a domestic corporate tax rate of 28%. The gap between those rates and 15% could become a political issue if companies can do better when headquartered outside of the US.

The 15% floor for foreign companies could be paired with a domestic quota of 25% and a foreign revenue quota for US companies of about 18%, Ms. Corwin said. The Democrats’ reluctance to raise the existing 21% corporate rate too much had already made a 28% corporate rate unlikely.

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Write to Paul Hannon at paul.hannon@wsj.com and Richard Rubin at richard.rubin@wsj.com

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