Negotiators from 131 countries have agreed on a major overhaul of taxation for the world’s largest multinationals. It is an attempt to deter complex international mitigation programs that have cost governments billions in revenue.
The broad proposals are designed to better suit a world where globalization and an increasingly digital economy mean that profits can easily be shifted from one jurisdiction to another. The deal, which was sealed in global talks in Paris last week, is up for discussion in the group of 20 finance ministers in Venice on Friday and Saturday.
The core of the complex package is a worldwide minimum corporate tax of at least 15%, which broadly follows a proposal by US President Joe Biden.
While the tax deal is complex in its details, the idea behind the minimum tax is simple: if a multinational company evades taxation abroad, it would have to pay the minimum domestically.
Here’s why it was suggested and how it would work.
THE PROBLEM: STEUERHAFEN AND THE “RACE TO THE BOTTOM”
Most countries only tax the domestic business income of their multinational corporations, assuming that the profits of their foreign subsidiaries are taxed where they are generated.
But in today’s economy, profits can easily slide across borders. The revenues often come from intangible assets such as trademarks, copyrights and patents. These can easily be relocated to where taxes are lowest – and some jurisdictions have been only too willing to offer reduced taxes or no taxes at all to attract foreign investment and revenue, even when companies don’t do real business there.
As a result, corporate tax rates have declined in recent years, a phenomenon that Treasury Secretary Janet Yellen described as a “race to the bottom”.
From 1985 to 2018, the global average statutory corporate tax rate decreased from 49% to 24%. From 2000 to 2018, US companies posted half of all foreign profits in just seven low-tax countries: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland. The OECD estimates the cost of tax avoidance to be 100 to 240 billion US dollars, or 4 to 10 percent of global corporate tax revenues.
That’s money governments could use if they see deficits growing from spending on pandemic aid.
THE SOLUTION: THE GLOBAL MINIMUM TAX
The talks aim to go below corporate tax rates by enacting a minimum that countries would levy on untaxed foreign income. In other words, if Company X, headquartered in Country Y, paid little or no tax on profits in Country Z, Country Y would tax those profits domestically up to the minimum rate.
This means that the reason for using a tax haven or its establishment would no longer apply. Biden has suggested a lower limit of 15% for global talks, but it could be higher.
ANOTHER PROBLEM: TAXATION OF âDIGITALâ COMPANIES
Another focus is what to do with companies making profits in countries where they have no physical presence. That can be done through digital advertising or online retail. Countries led by France have begun imposing unilateral âdigitalâ taxes, which hit the largest US tech companies like Google, Amazon and Facebook. The US calls this unfair trade practices and has threatened retaliation through import taxes.
THE SOLUTION: ASSIGNMENT OF TAX RIGHTS
Biden’s proposal focuses on the 100 largest and most profitable multinationals, regardless of what type of business they are in, digital or not. Countries could claim the right to tax part of their profits – up to 20% of the profits of companies above a profit margin of 10%, according to a proposal supported by the Group of Seven Wealthy Democracies. Governments would have to reduce their unilateral taxes to defuse the trade disputes with the US
The deal, reached last week in talks by the Organization for Economic Co-operation and Development, plays a role in Biden’s efforts to make changes that he believes would make the tax system fairer and increase revenue for infrastructure and clean energy investments. The US already enacted a tax on foreign profits under the Trump administration. But Biden wants to double the Trump-era rate to roughly 21% and also calculate that rate from country to country so that tax havens can be targeted. The president also wants to make it harder for US companies to merge with foreign firms and avoid US taxes, a process known as inversion.
All of these changes have to be approved by the US Congress, where the Democratic President only has a slim majority. Biden wanted a diplomatic victory in the OECD talks so that other countries would impose some form of minimum tax to prevent companies from evading their potential tax obligations.
The agreement reached at the OECD should be approved at the meeting of finance ministers, as 20 G-20 countries have signed up to the OECD agreement. More technical work would then be required at the OECD before the G-20 would give their final blessing at a summit of heads of state and government from October 30th to 31st in Rome. This is followed by implementation at the national level.
The global minimum tax would be voluntary. The countries would have to include it in their own national tax laws on their own initiative. According to Gabriel Zucman, an economics professor at the University of California at Berkeley who has written extensively on tax havens, the minimum tax will work even if some countries fail to register. He said in a tweet that “the fact remains: if some countries refuse to levy a minimum tax, other countries will collect the taxes they refuse to levy.”
The proposal to tax companies on profits when they are not physically present, for example by doing business online, would require countries to sign a written international agreement.
A major hurdle will be the approval in the US Congress. Biden’s tax proposals, which would be required to meet the global minimum, are met with opposition from Republicans, and the Democratic president has a slim majority. Rejection by the US, the world’s largest economy and home to many of the largest multinationals, could seriously undermine the global deal. All parts that are anchored in a tax treaty require a two-thirds majority in the US Senate. Still, Biden could argue that the passage would relieve US tech companies of onerous national digital taxes that would have to be withdrawn in favor of the global deal – a prospect that may be bipartisan.
AP Business Writer Josh Boak contributed from Washington, DC