For decades, the international corporate tax system has angered almost everyone – except the shareholders of the world’s largest multinationals and low-tax countries.
As the share of corporate profits in the global economy has grown and wages have fallen, large countries are finding it increasingly difficult to tax those profits.
That could finally change according to the proposals put forward by the US administration of Joe Biden in a 21-page document sent Thursday to more than 100 countries, which the FT obtained from several sources.
The proposal aims to break the deadlock in the long-running global negotiations organized by the club of rich countries of the OECD by proposing for the first time what would amount to a big deal.
Major advanced economies would gain the power to raise corporate taxes on U.S. tech giants and other large multinationals, and in return, a global minimum corporate tax would be introduced, allowing the Biden administration to generate significant additional revenue from US-based companies to finance its infrastructure. program.
“We want to end the race to the bottom on corporate taxation and establish a tax architecture in which countries work together for more equitable growth, innovation and prosperity,” the document said.
Three decades of a race to the bottom
According to OECD data, the average overall corporate tax rate in advanced economies rose from 32 percent in 2000 to just over 23 percent in 2018.
This is largely because smaller countries like Ireland, the Netherlands and Singapore have attracted mobile businesses by offering low corporate tax rates. Multinational companies with increasingly intangible assets, such as global technology companies, have shifted some real business and lots of profits to these tax havens and low tax jurisdictions, lowering their global tax bill.
But it has fueled competition among other countries to lower their tax rates as well, in an effort to keep businesses operating locally.
As a result, said Alex Cobham, chief executive of the Tax Justice Network lobby group, “we have had over three decades of a corporate tax race to the bottom, [and] it is time to turn the situation around ”.
If approved by other countries and the US Congress, the Biden administration’s proposals would be the biggest corporate tax shake up in decades – and could bankrupt tax havens.
Key to the deal lies in the United States’ new recognition that the two sides of international negotiations are closely linked – no deal can be reached on one aspect without concessions on the other.
What matters to the United States domestically is the introduction of a global minimum tax, as Biden and Treasury Secretary Janet Yellen pointed out earlier this week. This is called the second pillar of international negotiations.
A sales tax in each country
The breakthrough came with the recognition of the United States that the concerns of other countries about the lack of taxes paid by US-based technology companies must also be addressed; it is the first pillar of global discussions. “The second pillar cannot be fully successful without a stable multilateral international tax architecture,” the document acknowledges.
The United States is therefore proposing to give all countries the power to tax a portion of the global profits generated by a hundred of the largest companies in the world; the amount each country can collect would be based on the sales of businesses in that country.
Many of these companies are based in the United States, so it would have to give up some of its current taxing rights in order to address what its proposal called “popular concerns in all of our countries about mega. -companies ”.
In return, the United States said it would expect other countries to drop digital taxes it had unilaterally proposed. He also clarified that the new regime will not focus solely on digital businesses or US businesses.
In principle, the US plan is similar to the compromise proposed last year by the OECD, but it is much simpler, removing complicated rules on the types of companies and their industries that would be covered.
Some large, very profitable companies such as Microsoft and Apple would be hit harder by the US plan than the alternative proposals.
Is it sufficient?
Although it has only had a few days to review the US plan, the OECD believes it broadly meets the same goals as its own proposals and would generate a similar amount of revenue.
As a result, it has a good chance of finding support among other large countries; Italy, which this year chairs the group of major economies of the G20, has pledged to seek a framework agreement by this summer.
However, the US administration will have to obtain the necessary changes in tax treaties through Congress.
And US plans are a long way from the complete overhaul of the global corporate tax system that many activists have called for.
Only a small slice of global profits tax would be allocated to sharing, and the proposal would not address inequalities that favor rich countries over developing countries, the activists said.
“The spoils of the [increased] tax revenues are likely to be extremely concentrated in northern countries, ”said Tommaso Faccio, head of the secretariat of the Independent Commission for the Reform of International Business Taxation. “We want multinationals to pay their fair share, but this has to happen everywhere, not just in the United States, too.”
He said he had previously heard complaints from “disgruntled officials” in other countries that the bulk of the revenue would go to the United States and Europe.
And Cobham expressed concern about the small number of multinationals targeted by the US plan. The original OECD proposals would have covered around 2,300 companies.
“It’s not about changing the rules on how we tax multinationals,” Cobham said. “It’s about taxing a few. . . It doesn’t cater to the vast majority of people involved in profit shifting, but an ambitious minimum global corporate tax rate can go a long way in removing the incentives. “
Additional reporting by Emma Agyemang in Copenhagen