The world’s leading economies are on the verge of agreeing a set of principles that would revolutionize the taxation of multinational corporations after France and Germany put their support for a new US approach to this issue.
Talks about how it can be made more difficult for international companies to shift profits around the world in order to minimize taxes have been bogged down at the OECD for years, but are progressing rapidly, according to several governments.
The US presented plans for a global minimum corporate tax on Monday. On Tuesday, European countries backed the proposal but made it clear that this ambition by the Joe Biden administration must be accompanied by a deal so that they can tax an element of the tech giants’ global profits.
US Treasury Secretary Janet Yellen in February removed blanket US opposition to such a compromise, and on Tuesday French and German Treasury Ministers said the US was close to endorsing it.
The German Finance Minister Olaf Scholz said: “It is now realistic to expect that this year we will agree on an international framework for a minimum tax rate for companies and better taxation of the digital economy.”
French Finance Minister Bruno Le Maire welcomed US support for a global minimum tax, adding that he hoped “We can also move forward with Janet Yellen on taxing digital services to reach a comprehensive agreement at the OECD level this summer “.
The UK made it clear that the two elements must be linked for a global agreement. “The redistribution of profits so that large digital companies are taxed in the countries in which they make sales remains the focus of the UK,” said the Treasury Department, while underlining its support for the OECD process.
Vitor Gaspar, chief financial officer at the IMF, told the Financial Times that there has never been a moment when the reasons for optimism have been higher. “The change in the US position in these negotiations is a crucial development. It’s a development that makes the end of the race to the bottom in corporate tax much more likely, ”he said.
The Biden administration is proposing to raise the US prime tax rate to 28 percent and aiming for a global minimum tax rate of 21 percent on profits made in a country with a lower tax rate.
This would collect much more taxes from US-based multinationals, forcing tax havens and countries with low corporate tax rates like Ireland to raise their tax rates to at least the minimum level.
The US needs a global deal to prevent companies from relocating their headquarters to other jurisdictions to circumvent US regulations.
So far, the crux of the matter has been Washington’s refusal to allow other countries to tax a portion of US tech giants’ global profits in recognition of the money they make from sales in those countries. The new Biden government will likely only be able to agree on a global tax minimum if it makes concessions on this.
Some countries like France have put in place temporary digital taxes to boost U.S. tech giants’ revenues pending a global deal. The US threatened them with retaliation.
The IMF’s Gaspar insisted that a deal should not be dominated by the most powerful countries. “Taking the interests of developing countries into account is extremely important in this context,” he said.
Some tax lawyers are skeptical that a global compromise would be effective in practice, especially as any deal would have to go through the US Congress, where tax laws affecting US companies have often been watered down.
Dan Neidle, tax partner at Clifford Chance law firm, said, “People must not confuse Biden’s desire to receive more taxes from US companies with a desire to give other countries more taxes from US companies.”