It’s been a big week for a big idea. U.S. Treasury Secretary Janet Yellen Monday recommended for a global minimum corporate tax in its first major public speech. US National Security Advisor Jake Sullivan quickly emphasized the message, Tweeter that “the United States is committed to ending the race to the bottom in corporate tax rates and preventing businesses from moving jobs overseas” as a central part of its national security strategy. As policymakers around the world envision a global minimum corporate tax, it’s important to understand the context behind the concept and how this tax might actually work.
International business taxation has long been a challenge for tax authorities around the world. The emergence of globalization and intangible capital in recent decades has increasingly made difficult, and greater international cooperation is needed to make this taxation more effective. A global minimum tax on profitable multinationals would ensure that a basic level of income is collected from them. While this tax does not solve all of the problems associated with corporate tax avoidance and evasion, and its design and implementation require careful consideration, it would be an important and useful step.
The changing structure and behavior of multinationals poses dilemmas for governments. Should the profits of multinationals be taxed in the jurisdiction (s) where the economic activities and value creation take place, or where these entities have their technical headquarters? How do you deal with corporate subsidiaries and hard-to-value assets such as patents? These types of questions– next to the competition priorities such as revenue collection, global competitiveness and tax efficiency, illustrate the difficult task ahead for the global community.
In today economy companies can easily reverse their structure and shift profits to tax havens, and intangible capital (e.g. software) is more difficult to value and pinpoint accurately than tangible capital (e.g. a factory that produces physical goods). Countries competed for business investment, leading to a race to low while statutory corporate tax rates have been dropping steadily around the world for forty year. In 1980, the average statutory corporate tax rate around the world was around 40%, up from around 24% in 2020.
In addition, the number of tax havens has increased. And effective corporate tax rates are even lower than statutory rates given the proliferation of loopholes. In 2021, the British Virgin Islands, Cayman Islands, Bermuda, the Netherlands, Switzerland and Luxembourg were class the “jurisdictions most complicit in helping multinationals underpay corporate income tax”. Significant corporate tax revenues are at stake in all of this; governments are estimated to lack between $ 200 and $ 600 billion in revenue each year (about 10 to 15 percent annual worldwide corporate tax revenues).
Most economies use a version of a global or territorial taxation. In a global system, the income of domestic and foreign companies is taxed. To avoid double taxation, resident companies can claim a tax credit to offset all or part of the foreign income tax they have paid. In a territorial system, corporate taxes are paid only on income generated in the jurisdiction of the country. Most advanced economies have adopted territorial systems.
The United States used a global system until 2017, when the Tax Cuts and Jobs Act (TCJA) moved the country to a hybrid model closer to a territorial system. The TCJA presented several notables changes such as the elimination of a tax on dividends repatriated from foreign affiliates of US multinationals, a minimum tax on intangible profits of foreign affiliates of US corporations, and a single transitional tax on past profits of foreign entities owned by US multinationals. Despite these changes, U.S. multinationals continued to shift their profits to tax jurisdictions with lower corporate tax rates, in part due to the design. Globally, the scale of fiscal maneuvers is so great that macroeconomic data is deformed Going through “phantom investmentsWhere the big foreign direct investment figures do not reflect economic activity but rather empty corporate shells fashioned to cut tax bills.
To address this issue, the Organization for Economic Co-operation and Development (OECD) and the Group of Twenty (G20) have spearheaded base erosion and profit shifting (BEPS) – a multilateral negotiation with more than 135 countries, including the United States – since 2013. (It is to these negotiations that Yellen referred in his remarks.) world minimum tax is now one of the two central pillars of the BEPS initiative alongside a proposal to tax technology multinationals in part based on where their users are located. The debate on a tax on digital services was at the heart of the transatlantic tensions last year involving unilateral tax and tariff measures. A specific global minimum tax has not been agreed, but the basis framework of the way one would work involves a “reload“tax.
As an example, suppose country A has a corporate tax rate of 20% and country B has a corporate tax rate of 11%. The worldwide minimum tax rate is 15% and Company X is headquartered in Country A but declares income in Country B. Country A would “top up” taxes paid on profits made by Company X in Country B equal to the difference in percentage points between Country B’s rate of 11 percent and the overall minimum of 15 percent (for example, Company X would pay in taxes an additional 4 percent of the profits reported in country B). This approach would set a floor on global tax revenue collection and help change incentives for businesses, as businesses would know that profits transferred to tax havens would be subject to additional taxation. It would also ensure transparency on corporate tax practices, as the application of a global minimum tax would require country-by-country reporting of corporate activities.
Countries have also offered incentives to persuade low-tax countries to join the deal, including deny certain tax deductions on income earned in a country that does not meet the minimum tax rate. OECD released high-level income impact estimates, which assumes a global minimum tax rate of 12.5%, and found significant income gains for countries at all income levels.
Momentum for a global minimum tax stalled last year, in part because of roadblocks from the Trump administration, but he returned recently. the OECD aims for mid-2021 to reach agreement on a global minimum tax, and the International Monetary Fund and the United Nations Group for International Financial Accountability also recommended the measure. This timeline also aligns with pressure from the Biden administration for a global minimum tax as part of its comprehensive corporate tax reform. proposal, intended to help pay for the significant investments described in the American employment plan.
While a global minimum tax has high potential, in practice it is undoubtedly complicated. Which countries will agree? How will the report work? What counts as taxable income and what deductions should be included? Can countries apply it? Some companies are concerning on damage to their competitiveness due to possible double taxation and increased compliance costs, and certain tax experts question how efficient and effective a global minimum tax would be.
Some aspects of these reservations make sense. And because of widespread abuse and advanced sheltering techniques, a global minimum tax alone will not deter corporate tax avoidance and evasion.
Nonetheless, it is still worth trying to pass a global minimum tax. Once the system is in place, it will be easier to adjust the tax as needed to be more efficient. In addition, with such a low cost of capital, there is good reason to believe that companies will be able to adjust their investment decisions without too much. difficulty. Many multinationals are already preparing and prefer a world standard compared to country by country proposals.
An agreement of this nature would be unprecedented and would represent an important milestone for the future of international business taxation. Given the downward trend in business taxes, the scale of revenue losses and the need for resources as the world tackles challenges such as climate change and the recovery from the COVID pandemic -19, the complexity and potential imperfections should not prevent action.
Jeff Goldstein is Director of Strategy and Advisory at Fidelity Investments. During the Obama administration, he served as Deputy Chief of Staff and Special Assistant to the Chairman of the White House Council of Economic Advisers. He also worked at the Peterson Institute for International Economics. The views and opinions expressed in this article are strictly hers.