Trying to fix the flawed international corporate tax system is a Sisyphean task. But a new model of corporate taxation proposed by the Biden administration could curb decades of falling tax rates and aggressive planning.
The US master plan calls for a minimum global corporate tax rate of 21% and a proposal to reallocate part of the tax paid by the largest and most profitable companies to the countries where they make their sales .
This is similar to the ideas launched by the OECD in recent years. But the desire to redistribute a share of tax revenues would apply to a larger group of companies. This will likely make the policy more palatable to U.S. lawmakers, as it would no longer discriminate against U.S. digital companies.
The model would also defuse the international dispute over digital taxes fueled by the imposition of national levies in the UK, France and elsewhere. It would be a relief for some US tech companies, although others like Microsoft could be the losers. While digital taxes are found in its subsidiary LinkedIn, all of its activities are likely to fall within the scope of the American proposal.
Equally radical is America’s attempt to end tax competition by encouraging its peers to adopt a high minimum tax rate. This would affect countries like Ireland, where American multinationals play a disproportionate role.
Success is not guaranteed. Getting the plan through the US Congress will be a challenge. Internationally, cooperating on tax rates would mean breaking the decades-old habit of competing for corporate headquarters. It will take a lot of haggling to come to an agreement. Expect the minimum rate to be reduced from 21 percent to maybe 17 percent or so.
Nonetheless, the United States has enough leverage to strike a deal. The revenue generated will likely amount to around $ 100 billion – or 4% of global tax revenue – borne by at most 200 companies. For companies like Alphabet, that would be important. Its effective tax rate has only averaged 14 percent over the past three years.
The decision to concentrate tax increases on a relatively small group is recognition of the winning nature of the global economy. Governments have struggled to assert themselves against the power of multinationals. These measures, if adopted, would mark a change in the balance of power.
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