Corporate Tax

The worldwide corporate tax enforcement plan is shifting ahead however is dealing with a serious US hurdle

A complex global plan to combat corporate tax havens is making rapid progress on the geopolitical stage, but its fate could ultimately lie in the halls of a deeply divided US Congress.

Last weekend, the group of the big 20 economies endorsed an ambitious global tax plan that would effectively set a floor on how low countries can collectively levy taxes on highly profitable companies to prevent tax avoidance. G20 approval came shortly after 130 of the member states, which make up the bulk of the Organization for Economic Co-operation and Development, signed a draft plan earlier this month.

“The race to the bottom is one step closer to the end,” said US Treasury Secretary Janet Yellen, a key driver of the global negotiations, about the comprehensive global agreement. Yellen said the plan’s supporters include countries that account for more than 90% of the world’s gross domestic product.

The plan would set a global minimum tax rate of 15% for large, profitable companies. It would not generally force countries to increase their tax rates, but would instead force companies to pay tax collectors in countries where they do business so that companies’ annual tax bills meet the plan’s global threshold.

The new tax system would seek to force companies to pay more taxes where they actually operate, rather than channeling profits to low-tax countries like Ireland and the Cayman Islands, where companies take advantage of various loopholes to avoid taxes. Change is a long-cherished goal of tax activists around the world.

Research by the International Consortium of Investigative Journalists such as the Paradise Papers and Lux ​​Leaks revealed the extensive and sometimes baroque measures companies are taking to move profits to tax havens in order to lower their taxes.

When the ICIJ’s 2014 Luxembourg Leaks investigation uncovered how hundreds of prominent multinational corporations were using secret deals with the Luxembourg government to cut their global tax bills, the tiny European country’s finance minister, Pierre Gramegna, called the investigation a “game changer” and said ICIJ coverage had drawn the world’s attention to the issue.

In 2017, the ICIJ’s Paradise Papers shed light on the tax maneuvers of more than 100 multinational corporations, including Nike and Apple, who shifted profits around the world to amass $ 252 billion overseas. A recent study found that companies moved a staggering $ 1 trillion overseas in one year, stealing hundreds of billions of dollars in tax revenue from governments.

After a decade of multilateral discussions fueled by corporate tax scandals, the outstanding progress made by the new tax plan in recent months on the global stage is impressive. But its biggest test so far could be whether it can find official parliamentary approval in the many countries whose leaders recently approved it.

The US stands out among these. The Biden administration needs to get two major bills on which the plan is based through the US Congress. One of the main pillars of the plan is to create new mechanisms for cross-border business taxation. Many observers believe that, according to the Wall Street Journal, the plan will be based on the US Congress adapting international agreements to ensure US participation in the new tax system. Treaty changes often require a two-thirds majority in the US Senate – a rare majority for a plan that would mean a big party victory for the Democrats.

The Republicans in the Senate have already announced their opposition.

“Why should we pledge to double our global minimum tax is very bad policy,” Senator Pat Toomey, the senior Republican on the Senate Banking Committee, recently told news website Insider.

Last week, the Wall Street Journal’s conservative editorial page, widely influential in Republican circles, called the deal “bad for the US” and said it would make American companies less competitive.

US Conservatives aren’t the only ones questioning the proposed system. Low-tax countries like Ireland and Estonia have also refused to support the agreement – another factor that threatens the overall sustainability of the plan. Critics have claimed that the deal could restrict much-needed foreign investment in poorer countries with low tax rates. And since much of the plan is aimed at highly profitable companies, it could exclude some of the top global corporations that often make little or no profits on paper while adding billions to their executives’ assets. The OECD has recently taken steps to specifically ensure that parts of the Amazon business are included in the system.

Although the future of the tax plan is uncertain, the negotiations are a hopeful achievement for cooperation between countries on complex tax issues, according to Yellen.

“The last six weeks have been really significant for economic diplomacy,” Yellen said this week, according to the Wall Street Journal. “We are seeing a revival of multilateralism.”

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