Elections have consequences. Pandemics too. These 21st century political truisms could bring about a fundamental shift in the relationships between businesses and states around the world.
Or maybe not. On April 5, U.S. Treasury Secretary Janet Yellen launched the idea of a global minimum corporate tax rate in a speech to the Chicago Council on Global Affairs. Such a move, she said, would allow the post-COVID recovery to unfold on a “level playing field” and help end a “30-year race to the bottom” of corporate taxation.
It is not difficult to see where this is coming from. Yellen boss President Joe Biden is pursuing an ambitious national agenda that includes a $ 2 trillion infrastructure plan. Part of what he has planned is deficit-financed, but much of it depends on tax increases for businesses and the very rich – to get them to “pay their fair share,” as stated. Biden at a joint session of Congress last month.
The crippling cost of the pandemic is driving an insatiable thirst for income in capital cities around the world. Governments frustrated with the tax strategies employed by digital giants – mostly based in the United States – have implemented their own taxes on digital services. Canada’s DST goes into effect next year and is expected to bring in $ 3.4 billion over five years.
Former US President Donald Trump’s administration hated DSTs and threatened to impose tariffs on countries that introduce them. It also decided to impose a minimum tax on income earned by foreign affiliates of US companies from “intangible” assets – patents, trademarks, the items that fuel the knowledge economy – known as name of “low tax intangible global income” or GILTI. The idea was to remove the incentive to shift profits from the United States to low-tax jurisdictions overseas.
Now, the Biden administration wants to go further by lowering the rate for American companies from 21% to 28%, and the rate for American companies abroad from 10.5% to at least 21%. If Washington succeeds in getting most of the major economies to adopt a global minimum rate close to its own overseas rate, it could undermine the key political argument against raising corporate taxes, which is that they send investors rushing to the nearest low-tax jurisdictions.
“The GILTI rule has really not worked in aligning US tax rules with those of the rest of the world and seems to have affected US competitiveness,” said Robert Korne, tax lawyer at Spiegel Sohmer in Montreal. “Also, with the exception of the recent regulations on high tax exemptions, in many cases this did not bring in much income once foreign tax credits were factored in.
“If the United States is the only country currently raising its corporate tax rate, it creates further financial disadvantage for US-based multinationals.
“That’s why the Biden administration needs the world with a minimum rate. And this is where the question of which countries can tax what and where comes into play. “
The negotiations negotiated by the OECD on global business taxation are structured around two political “pillars”: a global minimum rate and a global sharing of tax rights on income earned by corporations in jurisdictions where they do not. have no physical presence (which, for digital behemoths like Facebook, is pretty much everywhere).
It’s safe to say that the United States is much more enthusiastic about the first pillar than the second – and the tariff threat against countries introducing DSTs is not entirely out of the question. But without getting Americans to agree to share the wealth generated by American companies overseas, it’s hard to see an international consensus forming on a meaningful global minimum rate.
“It’s easy to draw an analogy with how the euro works,” said Patrick Marley, partner at Osler in tax law. “A common currency does not mean that countries want the same ones. Some EU countries benefit when the euro trades at a higher value, others do better when it trades at a lower value.
“Tax policy is similar: there are winners and losers. If every country has the exact same corporate tax rate, the United States is the big winner because of its market size and the natural synergies of businesses. “
So even though Finance Minister Chrystia Freeland has spoken glowingly about the concept of a global minimum rate, it’s worth considering whether Canada would be willing to ditch its DST without getting something big in return by the through a global agreement on tax rights.
“It’s hard to say what Canada’s interest is in this regard other than consensus for consensus,” said Marley. “It’s not at all clear that this would be good for us.”
Tensions over tax rights, coupled with the desire of low-tax jurisdictions like Ireland to maintain their competitive advantage, make the prospect of a worldwide rate close to 21% seem like a pipe dream.
“If you could get a deal on an overall minimum of, say, 12%, that wouldn’t have much of an impact – maybe a few low-tax, no-tax jurisdictions would be affected,” Korne said. . “But to get an agreement on a more meaningful rate, other countries are going to want a piece.
“In other words, everyone has to come together. The different DSTs only complicate matters. But if you just give America whatever it wants, they won’t be at the table when the time comes to talk about what you want.
Doug Beazley is a regular contributor based in Ottawa.