Tips on how to Tax Multinational Firms

The finance ministers of the world's seven richest economies reached a groundbreaking deal last week that promises a new era in which harmful tax competition is replaced with tax cooperation that benefits all countries involved.

It would impose a uniform minimum tax of 15 percent on all multinational corporations, over 90 percent of which come from G7 countries. If these countries impose a uniform tax of 15 percent on their multinational corporations, there can be no competitive disadvantage because all competitors are subject to the same tax rate.

The Biden administration should receive full credit for brokering this deal. She was responsible for breaking the impasse that resulted from the Trump administration's refusal to engage in collaborative tax policy efforts. Additionally, the deal removes the tax dispute over the big U.S. tech companies, which are now subject to the same 15 percent tax as everyone else.

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There have been numerous attempts to tax the foreign profits of multinational corporations since the 1960s. The United States led the effort, followed by the other G7 countries, but all of these efforts were hampered by the argument that countries could not afford to unilaterally tax their multinationals because it placed them at a competitive disadvantage vis-à-vis multinationals other rich countries would have. This argument culminated in the US tax law of 2017, which for the first time completely exempted part of the profits of US multinationals from tax because other G7 countries taxed their multinational companies in this way.

When she took office, the Biden government proposed increasing the US tax on foreign profits of American multinationals from 10.5 percent to 21 percent and abolishing the tax exemption in 2017. But it immediately ran into the well-known "competitive disadvantage" argument that any tax reform would likely stop.

The competitive disadvantage argument has always been misguided, as there is no evidence that the pre-2017 regime disadvantaged US multinationals. In fact, most of the leading multinationals are American and very profitable, and the actual tax rate paid by the top 100 US and EU multinationals before 2017 was practically the same. Politically, however, the competitive disadvantage has proven to be decisive – until now.

The competitive disadvantage argument has always been misguided, as there is no evidence that the pre-2017 regime disadvantaged US multinationals.

Such an agreement will not harm developing countries either. A basic rule of international tax norms is that countries where multinational corporations are headquartered, such as the G7 countries, must prevent double taxation by paying taxes paid to countries where the multinational corporations operate entirely on theirs Allow taxes to be credited. These are often developing countries, and the deal means multinational corporations can no longer play them off against one another by threatening to move elsewhere if the developing country does not give them tax breaks. This includes wealthy countries playing the same games by allowing multinationals to make profits in countries with extremely low taxes.

Granted, many progressives think the 15 percent is way too low, and the government appears to be abandoning its efforts to raise the corporate tax rate to 28 percent, at least for now. However, the government is proposing to widen the tax base by aligning it with the revenue reported in the multinationals' financial statements, which allows revenue to be as high as the 28 percent rate would on a narrower basis.

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There are many hurdles before this agreement can be implemented. The hardest part is agreeing on a common system for calculating the profits of the multinationals, but there is already an agreement to show these profits on a country basis which can be used as a basis.

Another important issue is how to get countries like Ireland that oppose the deal because they benefit from a corporate tax rate of 12.5 percent (and often much lower) to work together. However, this agreement does not require Irish cooperation as it is based on taxation by the main administrative area proper (the G7 country) rather than the area in which the multinational does business or is nominally based for tax avoidance reasons.

A third challenge is to apply the agreement to technology giants like Facebook, Google and Amazon. The US and EU need to come to an agreement on how much profit can be taxed in the country in which these multinationals operate, and such an agreement requires changes to the tax treaty network. Significant progress has already been made in this regard and the G7 deal improves the chances of a final deal being reached this year.

Finally, any final agreement must be passed by Congress and all treaty amendments must be ratified by the Senate. This is a major political challenge for the Biden government.

The entire history of US taxation since 1986 suggests that it is more important to focus on the structural aspects of taxation than on the tax rate. Interest rates have changed under every administration since 1986, increased under Democrats, and decreased under Republicans. However, the structural features of the 1986 tax reform and the structural changes adopted in 2017 are likely to last for a long time. A future government with a larger Congress majority could well increase the quota to over 15 percent.

However, the principle of subjecting all multinationals to a minimum tax may persist. Once that is achieved, the competitive disadvantage argument becomes untenable. That alone is cause for celebration. In addition, the deal is likely to raise over $ 50 billion in US taxpayers' income that can be afforded to fund projects for everyone.