In 2018, American multinationals said they made $ 97 billion in Bermuda. Given the island nation’s GDP this year was $ 7.2 billion, that number would seem strange. At the time, American companies were reporting 740 employees on the island, meaning each company had to rake in an average of an impressive $ 131 million for their businesses.
These are not false numbers, but the result of common offshore tactics used to minimize the tax burden. Because of the low corporate tax rates in certain countries, large companies can engage in nifty “accounting gimmicks” such as setting up tiny subsidiaries overseas and passing money through those countries to increase their revenues and avoid going to the International Revenue Service branch off. Some of these countries that are currently attractive to foreign investors because of these low taxes – Ireland, Hungary and Estonia – are the last to join a global consensus on a global minimum tax rate that will impose on companies making profits overseas.
With these additions, 136 countries representing 90% of world GDP will sign the agreed minimum rate of 15%. If these nations pass individual laws to ratify the change, it could be rolled out globally by 2023, allowing countries to increase their tax revenues and stop a “race to the bottom” where every country fights to attract interested businesses to sell at a lower rate. and therefore attracts foreign investment. However, experts say the U.S. government can do more to ensure companies pay their fair share.
As a result of months of negotiations, the decision means that companies operating overseas will have to pay a minimum tax of 15% on their overseas profits, which is of little benefit to continuing various “accounting gimmicks” currently at play, says Steve Wamhoff, Director of Federal Tax Policy at the Institute on Taxation and Economic Policy (ITEP), a non-profit, non-partisan think tank. Ireland, for example, has lured big tech companies to its shores, creating jobs and investing, but it has also enabled companies like Google to move their money through Ireland and then through countries like Bermuda to lower its tax burden. (This is known as a Double Irish; there is also a Double Irish Dutch Sandwich.)
Countries with lower tax rates held out during the global negotiations, believing they would suffer in the long run, and feared businesses pulling out and moving home with little incentive to stay, resulting in less infusion of money and jobs into theirs Economies leads. But, says Wamhoff, while a country like Bermuda can benefit from the old model by receiving subsidiary formation fees, “the people who benefit most are Apple’s shareholders,” he says. “You’re just getting richer than usual.”
The G20 should finally confirm the 15 percent proposal at the end of October. Then it has to be passed by the legislatures of each country. This may be an easier task in many other developed countries than the US, which could face obstacles in Congress. Republicans have long argued that cracking down on offshore profits will render the US uncompetitive. “That was always a lame argument,” says Wamhoff, “but now that argument seems completely dead as other countries agree with it.” The best bet, says Wamhoff, is to make sure it is included in the currently debated reconciliation law which Treasury Secretary Janet Yellen has confirmed. If it didn’t pass in the US, other countries could still move on, but companies could convince other nations that the US is not worth giving up
In the consensus there are still notable objectors: Kenya, Nigeria, Pakistan and Sri Lanka. Developed countries argued that they are partially implementing the standard to encourage more equitable economic growth around the world, but developing countries will not immediately benefit from the higher tax rate as they are not hosting companies, says Didier Jacobs, senior policy advisor at Oxfam America . According to a statement by the African Tax Administration Forum, many nations wanted a higher tax rate of at least 20% as most African countries already have higher tax rates (30% in both Kenya and Nigeria). African multinationals will therefore continue to have little incentive to do their business domestically.
Jacobs says there are other larger economies, including Argentina, that also believe they are doing bad business, but these four smaller economies can afford to take a stand to make their voices heard. “It is shameful that a handful of tax havens have further watered down the deal at the last minute,” he wrote in a statement. In an email he added, “The direct benefits to rich countries will be tangible and immediate. Which is particularly outrageous in this time of global crisis. “
In fact, the minimum rate is actually a step down from the 21% proposed by the Biden government. But the US could still set its own offshore corporate income tax rate at that level (currently 10.5%), six points higher than the global minimum. That would mean US companies paying the 15% would also owe 6% more if the US were to introduce their own rate. (The House Ways and Means Committee has less ambitious goals than Biden and recommends a rate of 16.5%.)
A higher US rate would be a way to generate more domestic revenue, especially at a time when public spending is required to rebuild COVID-19, beyond the estimated $ 150 billion increase in world revenue, according to Jacobs is not particularly high. He added that Congress could also change an existing rule that says companies will only be taxed if their foreign investment return hits a 10% threshold. “This international agreement really only sets minimum standards,” he says. “Congress should definitely go beyond that if it really wants to solve these problems.”