Biden’s global tax plans send mixed signals

UUnited States President Joe Biden has declared his intention to increase spending. After adding a $ 1.9 trillion stimulus package to those announced by the Donald Trump administration, he unveiled a massive eight-year, $ 2000 billion infrastructure spending program for revive the American economy and restore its competitiveness. There will likely be another $ 1 trillion investment plan in child care, health care and education.

To make it clear that the plan is not just rhetoric, the administration proposes that the total planned investment of $ 3 trillion or more be funded by an increase in the U.S. corporate tax rate from 21 to 28 percent, an effort to implement a global minimum corporate tax of 21 percent and unannounced increases in income and capital gains taxes and inheritance taxes imposed on the wealthy. In this way, Biden hopes to unite Democrats and take his more progressive sections with him as he embarks on difficult negotiations with Republicans to gain support for the ambitious agenda.

The proposed increase in the rate for domestic companies is not as heavy as it seems. It only partially reverses the tax cuts adopted by Trump, leaving the rate well below the 35% hit under Barack Obama. In addition, the increase is to be phased out over a period of 15 years, the expenditure being financed by loans in the meantime. Yet big business in the United States is ready to fight, declaring the proposed tax increase “dangerously ill-advised.” However, there is widespread resentment that even in the worst of times, large companies reap large profits and manage to pay little or no tax. With the popular support required, the proposals may well pass.
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Opponents of the corporate tax increase argue that it would weaken U.S. businesses relative to their competitors headquartered in jurisdictions with much lower tax rates and encourage them to migrate to tax havens elsewhere. The infrastructure finance plan also addresses this problem by supporting a global minimum corporate tax rate that it wants to set at 21%. This is equivalent to doubling the minimum tax rate on foreign profits of US companies by 10.5 percent. If the rate in a location where a multinational initially makes profits is less than 21 percent, the government of the country in which that multinational is headquartered may levy taxes to cover the difference.

Global minimum corporate tax

Without wasting time, Treasury Secretary Janet Yellen appealed to other countries to support the proposal for a global minimum corporate tax rate. In a speech to the Chicago Council on Global Affairs, she reportedly said, “Together we can use a global minimum tax to ensure that the global economy thrives on a more level playing field in corporate taxation.” multinationals, and drives innovation, growth, and prosperity. This is a change of position for the United States, which in the past wanted the choice of jurisdictions to be imposed to be left to multinationals.

With the United States behind it, the proposal for a global minimum tax on transnational corporations is likely to gain broad support, although not necessarily at the 21 percent level. All the more so because of the ongoing discussions between 135 countries involved in the inclusive process of the Organization for Economic Co-operation and Development (OECD) on the erosion of the tax base and the shifting of profits on the bond for companies to pay taxes in the jurisdictions in which they operate, rather than shifting profits to tax havens and paying low or negligible taxes.
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A plan has been prepared by the OECD Secretariat on how this can be done and the idea is to reach an agreement later this year. This would mean that all countries contributing transnational revenues, and not just the one where the parent company is headquartered, would benefit and share the taxes imposed on tech giants and other multinationals, many of which are from the United States. The “aggregate” corporate minimum tax is viewed as compromising and permitting this possibility, to ensure that higher rates in its jurisdiction do not cause a further exodus of US businesses to low-tax locations overseas.

If a global consensus is reached, Apple, Google, Amazon and Facebook, in addition to Starbucks, LMVH and Mercedes Benz, will be forced to return part of their surpluses in the form of corporate tax to the governments of the jurisdictions in which they operate and where. they have their seat. In the past, companies like these shifted their profits to places that were tax havens. By one estimate, US multinationals had increased the share of foreign profits that were shown to be earned in tax havens from less than a tenth in the 1960s to more than 50 percent in 2018. It was not just about ‘places such as the Cayman Islands and British Virgin Islands, but also Ireland and the Netherlands, which have seen some benefit in getting companies to channel their profits through their jurisdictions in exchange for low income from taxes clements. For example, to attract interested businesses, Ireland lowered its corporate tax rate from 32% to 12.5% ​​over a five-year period ending in 2003.

Reduction of the tax base

A consequence of such competition is, of course, a race to the bottom which, in a world where multinational companies increasingly account for an extremely large share of revenues and profits, means that governments are faced with a tax base. increasingly reduced tax. Combine this with a generalized bias for lower taxes, which is reflected, according to The Economist, by a drop in average global corporate tax rates from 40% in 1980 to 24% in 2020, and a strong streak of fiscal conservatism that restrains budget deficits and government borrowing, and the result is a sharp drop in spending public. This translated into lower growth during the years of globalization when these trends were evident. But now the US administration under Biden sees the reduction in spending as underlying the loss of competitiveness of the United States vis-à-vis growing rival China which has maintained extremely high investment rates for decades. The agenda is to sharply increase government spending, for which higher tax revenues and a global fiscal compact are prerequisites.

Taxes on digital services

However, it is unlikely that it will be easy to reach a global agreement. This is reflected, for example, in the United States’ position on digital service taxes (DST). In late March 2021, with the Biden administration in place, the offices of the United States Trade Representative (USTR) released a series of reports on Section 301 DST investigations imposed by a range of trading partners (Austria, India , Italy, Spain, Turkey, and the UK) who deemed them eligible for trade action because their DST “discriminated against US digital companies, was inconsistent with international tax principles, and weighed on US companies.”

USTR Katherine Tai, a person named by Biden, noted, “The United States remains committed to achieving international consensus through the OECD process on international tax matters. However, until such consensus is reached, we will maintain our options under the Section 301 process, including, if necessary, the imposition of tariffs. “

India’s taxes on digital services make it clear what is at issue here. In 2016, India introduced a 6 percent equalization tax on payments for online advertising services to non-resident agents. In 2020, the scope of the tax was extended to include payments to non-resident e-commerce operators deriving income from the provision of e-commerce services, such as digital platform services, sales of digital content and data services, and the rate set at 2 percent.

The basic idea behind the tax is that since digital commerce allows non-resident entities to provide services and earn income from Indian residents without having a physical presence in the country, they would not record any income. and profits here. This deprives the Indian government of the tax revenue it would otherwise derive from such activities, in place of which the DST was imposed. The OECD model of international taxation recognizes that countries in which customers are located remotely served by multinationals with significant income and profit are entitled to a share of the income derived from the taxation of those profits. Thus, the plan foresees to allocate a part of these profits to these countries, which can benefit from the taxes levied on these profits. If the United States wants its proposal for a global minimum corporate tax to pass, it should agree to a version of that proposal.
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Given this, and the fact that the equalization tax has been in place for some time, the best option for the USTR would have been to hang on to blaming India, and other trading partners levying DSTs, of d ‘have violated the principles of international transactions. To state, on the contrary, that the United States would maintain its options under the Article 301 process and threaten to impose tariffs, is to send contradictory signals concerning the willingness of the United States administration to cooperate. in the task of crafting a global tax architecture largely to advance its ambitions of restoring the economic competitiveness and dominance of the United States.

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