The Biden administration has proved to be imaginative and bold in many ways. Yet, from the point of view of its leading partners, few proposals are more significant than that for a global minimum rate of effective corporation tax. This should open the way to a resolution of a number of issues that are as important as they are technically complex. Its partners should urgently seize this opportunity to agree reform.
In a world of multinational corporations, mobile capital and seamless digital transactions, the taxation of companies poses at least three huge challenges. First, it is too easy for modern businesses to shift large portions of their profits into tax havens, such as Bermuda or the Cayman Islands, or low-tax jurisdictions, such as Ireland. Second, countries are engaged in a “race to the bottom” on corporate taxation, from which ultimately they lose. Finally, it is hard to identify where modern businesses with large intangible capital, especially digital businesses, locate their activities. This duly turbocharges the other two issues.
As these challenges became more obvious, the OECD sponsored analysis and discussion of what it calls “base erosion and profit shifting”. Those discussions finally settled on two “pillars” of any resolution: “pillar one” focuses on how profits should be allocated and “pillar two” on the need for a global minimum rate.
Yet, until the election of the Biden administration, agreement could not be reached. One difficulty, related to pillar one, was the desire of the UK, France and others to tax the digital giants that operate within their economies, but pay next to no corporation tax, even if domestic competitors do so. Another, related to “pillar two”, was to agree any minimum rate of tax.
The US proposal takes the world part way to solutions but not all the way.
It does offer a minimum rate of tax. Initially, the US proposed a rate of 21 per cent. But it has already lowered this to a far less onerous 15 per cent. This is a significant concession, since the administration wishes to raise the US headline rate to 28 per cent. The administration must be unlikely to make further concessions, since the risks of a new race to the bottom rise, the bigger the gap between the agreed minimum and domestic US rates.
It also offers only part of a solution to the desire to tax digital businesses, which is important to Rishi Sunak, the UK’s chancellor of the exchequer. Sunak is not just interested in raising more tax from businesses based in the UK. He also wants to tax the global digital giants that do business there, reflecting a broader push towards local taxation of local sales. Washington insists it cannot accept discrimination against US businesses and that no system of taxation should be specific to any one sector.
The US proposal is, therefore, to focus on the 100 largest multinational enterprises. This, it argues, could raise about as much money as would considering many more. It would also focus on the companies that benefit most from global markets, are most engaged in intangible activities and are best equipped to handle complex cross-border allocation of profits.
No system of global corporate taxation can be perfect, partly because the issues are complex and partly because the interests of countries are in conflict. But the US proposals have now opened up room for a compromise that would resolve today’s principal challenges, by halting the abusive use of tax havens, stopping the race to the bottom and preventing huge companies from operating freely within a country’s markets while paying it no tax. This is a good start. It is essential now to reach a satisfactory agreement.
Letter in response to this article:
Emerging states will resist G7 brow beating on tax / From Gary Clyde Hufbauer, Non-resident Senior Fellow, Peterson Institute for International Economics, Ranchos de Taos, NM, US