08 Apr Return of US to Multilateral Tax Debate Not Worth ‘Yellen’ About
(Article Updated 9th April 2021)
The Biden administration has floated a new proposal that would apply a new international tax code to at most 100 global corporate giants. Companies that fall within the scope of this plan would have tax obligations in countries where they have users or consumers.
This is an entirely new proposal with only 2 months left before the deadline that has been set to achieve political agreement.
Immediate questions that come to mind and need to be addressed are as follows:
- The original package included two components, one relating to the right to tax digital and consumer-facing businesses in market jurisdictions; and the other relating to the global minimum tax rate. Will this new proposal replace both components?
- How can such rules be implemented when they are targeted at a select group of companies measured upon ranking criteria (top 100 companies) and revenue and profitability thresholds that will inevitably fluctuate?
- What are the tax principles that will underlie the scope of the new rules and how will companies defend themselves in the event of a tax dispute?
- Will such a proposal trigger local jurisdictions to apply the same rules, exercising taxing rights on the corporate giants at the level of the local jurisdiction?
- A key driver of the negotiations was to avoid a trade war arising from the US imposing additional tariffs on countries which imposed unilateral digital services taxes in local jurisdictions. So far, the US Trade Representative has found 7 countries – France, UK, Spain, Austria, India, Italy and Turkey – that impose digital taxes which the US considers to be discriminatory against US companies. Will this compromise solution be sufficient to convince local jurisdictions to remove taxes on digital services that are imposed locally?
It is not often that the issue of corporate tax reform becomes a hot topic of discussion, but certainly, this week it took centre stage. The headlines made frequent mention of US Treasury Secretary Jane Yellen’s case for a global minimum corporate tax rate. Like the return of the prodigal son, Yellen’s speech on international economic policy was marked as an American return to the “global stage”.
However, we need to question some assumptions before we can get to the real facts of the story.
Assumption #1: The Global Minimum Corporate Tax rate is a new concept proposed by the Biden Administration and Janet Yellen
The global minimum corporate tax rate is not new. In the US, it was first introduced under the Trump administration. At the global level, discussions have been ongoing since 2019.
Today, the US already imposes a global minimum corporate tax rate. Known as Global Intangible Low Tax Income, or GILTI, it was part of President Donald Trump’s tax overhaul within the 2017 Tax Cuts and Jobs Act. Based upon the US rules, the GILTI tax rate is effectively set at 10.5%. However, reforms are being proposed by the Biden administration to increase the minimum tax rate to 21%
At the international level, the global minimum corporate tax rate has been under discussion for at least 2 years. Discussions were formally kicked off in February 2019 when the Organisation for Economic Co-operation and Development (OECD) released a public consultation document setting out a global anti-base erosion (“GloBE”).
Since then, the Inclusive Framework (a group of 139 countries) has been working together to achieve consensus under OECD’s leadership. While the negotiation process has been driven by politics, there has also been a commendable effort by the working team to ensure the collective voices and views are given consideration. Political agreement is expected in time for the July 2021 summit of G20 Finance Ministers. This would include an agreement on the minimum tax rate that would apply, currently rumoured to be set at 12.5%.
Assumption #2: America is back as a global leader and is returning to multilateralism
America’s proposals for the global minimum corporate tax rate of 21% is necessary to ensure that America remains competitive.
President Biden recently remarked, “America is back” and “ready to catalyse global action on shared challenges”. In a similar vein, Yellen said to the Chicago Council on Global Affairs: “Together we can use a global minimum tax to make sure the global economy thrives based on a more level playing field in the taxation of multinational corporations, and spurs innovation, growth and prosperity”.
Yet, despite this rhetoric, the following is evident:
- The Global Tax Rate proposal is not new to U.S. Multinational Co-operations (effective for financial years ended after 31 December 2017). What is new in Biden’s “Made in America Tax Plan” is an increase in the proposed tax rate to an effective rate of 21% (along with other measures to further increase the impact of the GILTI tax). This coincides with the minimum rate that has been proposed by Yellen.
It is indisputable that the United States, in ostensibly trying to achieve a more level playing field, coincidentally also appears to be the main beneficiary under the convenient guise of a return to multilateralism.
Assumption #3 – The Global Minimum Tax Rate is necessary to counter profit shifting activities
The Global Minimum Tax Rate may counter profit shifting activities but there are far more effective measures to do so. In addition, at 21%, the global minimum tax rate is punitive.
On the face of it, the global minimum tax rate may discourage profit shifting activities. However, there are two underlying issues.
First, while harmful tax competition should clearly be addressed, a global tax rate at 21% will not only wipe out fair competition but will be punitive for many countries at a time when countries are already struggling to cope with the fiscal impact of the COVID-19 pandemic. Furthermore, since 2019, the international tax community has already made significant progress to address harmful tax practices and base erosion activities. The measures that have been put in place are sophisticated and address the underlying issues, such as increased transparency and directly addressing anti-avoidance practices.
Second, there are many factors beyond tax rates that affect tax morale and tax compliant behaviour. OECD’s report on “What Drives Tax Morale” mentions that tax compliant behaviour is influenced by satisfaction with public services and expenditure, trust in government and perceptions of corruption. Thus, countries which have efficient public systems and high levels of compliance do not need to resort to excessive tax rates. In turn, compliant behaviour is seen in countries which are open, transparent and trusted.
Mandating an excessive global minimum tax rate is a blunt tool to discourage profit shifting. Under Biden’s Tax Plan, apart from the global minimum tax rate of 21%, he has also proposed a minimum tax of 15% on book income for companies reporting a net income of $2 billion or more. This is intended to address loopholes in the tax law, as well as the presence of offshoring incentives which enable large corporations to decrease profits exposed to tax liability.
The proposal for a global minimum tax rate is far from a new concept, nor a US one, however much it seems to be in the eyes of the mainstream media over the past few days. Moreover, while the return of the US to the negotiating table is positive, let’s not forget the global negotiations have been on the road for more than 2 years. The impossible work of ploughing through the complexity of such a system by Inclusive Framework member countries under OECD and OECD Centre for Tax Policy Director, Pascal Saint-Aman’s leadership deserves recognition.
As we await the much-anticipated political agreement on the Global Anti-base Erosion rules in July, all voices, especially those who have been intricately involved in the design of the global rules need to be heard.
Time will tell if tax reform keeps its place in the headlines in the weeks to come, but even if discussion drops from the front pages, the issue will remain a highly significant one that all multinational businesses need to stay tuned for.
Annalise Foong is the Director of Financial and Tax Advisory at the Future-Moves Group. She has extensive experience in this field, in particular with a focus on Compliance, Tax Policy and Transaction Advisory. If your organisation is grappling with a complex tax puzzle and looking for professional and practical consultancy support, do get in touch at firstname.lastname@example.org.