Treasury’s Yellen to Name for International Minimal Corporate Tax Fee — third Replace

By Richard Rubin and Kate Davidson

WASHINGTON — Treasury Secretary Janet Yellen argued for a global minimum corporate tax rate Monday, seeking international cooperation that is crucial to funding the administration’s $2.3 trillion infrastructure proposal.

President Biden’s proposal to raise the corporate tax rate to 28% from 21% would push the U.S. from the middle of the pack among major economies to near the top. The Biden plan would also impose a 21% minimum tax on U.S. companies’ foreign income, remove an export incentive and raise taxes on some foreign companies’ U.S. operations.

If the U.S. raises its tax rates and imposes higher burdens on U.S. companies’ foreign profits, a global minimum tax would help prevent companies based in other countries from having a significant potential advantage. That coordination and the ensuing tax revenue — not necessarily the aims of U.S.-based companies — rank high on the administration’s priorities.

“Competitiveness is about more than how U.S.-headquartered companies fare against other companies in global merger and acquisition bids,” Ms. Yellen said in remarks to the Chicago Council on Global Affairs on Monday. “It is about making sure that governments have stable tax systems that raise sufficient revenue to invest in essential public goods and respond to crises, and that all citizens fairly share the burden of financing government.”

Ms. Yellen’s remarks came as finance ministers prepared to gather virtually for semiannual meetings of the International Monetary Fund and World Bank this week.

Under the Biden plan without a global minimum tax, a U.S. address becomes a potential disadvantage, meaning that foreign-owned businesses operating overseas could be significantly more profitable than competitors owned by U.S. companies.

The U.S. has long had more stringent tax rules on its companies than other countries do, but business groups warn that a significant disparity could lead to U.S. companies getting taken over by foreign competitors. Such tax rate gaps could also reanimate inversions, transactions in which U.S. companies take foreign addresses, often through mergers. The U.S. tax-rate cuts and Obama-era regulations made them less attractive.

“It would take the pressure out of the system if there was alignment along the global minimum approach, if the U.S. were to go for such a high offshore rate,” said Manal Corwin of KPMG LLP.

Ms. Yellen faces another tough task — pushing the Biden administration’s corporate tax increases through a closely divided Congress. On Monday, Sen. Joe Manchin of West Virginia, a key centrist Democrat, said he would prefer a 25% corporate rate.

“We’re going to have some leverage here, and it’s more than just me,” he said to a West Virginia radio station. “There’s six or seven Democrats that feel very strongly about this. We have to be competitive, and we’re not going to throw caution to the wind.”

Many of the challenges that have slowed global corporate-tax negotiations for years still remain.

In 2017, the Republican Congress created a minimum tax on U.S. companies’ foreign income of at least 10.5%. Ms. Yellen’s predecessor, Steven Mnuchin, backed minimum taxes as part of international negotiations among more than 100 countries. Those complicated talks have been advancing over the course of the past few years, but they are fragile, and progress has been slowed by the pandemic.

The big difference now is that the Democrats’ domestic economic agenda depends partly on other countries following along with their own tax policies. Although many countries have endorsed minimum taxes, others may not accept one unless they can also stake a bigger claim to tax the profits of U.S. tech companies.

Mr. Biden said on Monday that he wasn’t worried that higher taxes would drive companies out of the U.S. Economists generally think higher corporate taxes are borne in the short run by shareholders — including foreigners and retirement accounts — with longer-run effects on wages and prices.

The debate touches on the running tension in international taxation — whether to tax companies equally based on the location of their headquarters or the location of their income. The U.S. didn’t have a pure system one way or the other before 2017 and it doesn’t have one now.

The 2017 tax law, which passed without a single Democratic vote, leaned toward taxes based on the location of income, adopting a view that U.S. companies engage in global commerce largely to serve foreign markets and that those operations support headquarters jobs in the U.S.

The 2017 law lightened taxes on U.S. companies’ foreign profits, so a U.S. company in the German market faces a tax burden that looks more like its German and British competitors. It included special rules and a minimum tax — the Global Intangible Low-Taxed Income tax, or GILTI — to limit the benefits from loading profits into low-tax countries.

The Biden administration is focusing instead on generating revenue. Democrats would push the system in the opposite direction from the 2017 law, so the U.S. would have a bigger claim on U.S. companies’ profits, regardless of where they are earned. That reflects a view that U.S. companies are willing to shift jobs abroad for tax advantages.

Democrats’ changes would also decrease the benefits of having profits abroad as opposed to profits in the U.S., but they would make a U.S. corporate headquarters more of a liability.

The corporate tax changes — separate from taxes the administration is likely to propose soon on closely held firms and high-income individuals — would generate $2 trillion over 15 years. That is enough to pay for eight years of higher spending on roads, bridges, transit, broadband and other programs.

Three Senate Democrats — Ron Wyden (D., Ore.), Sherrod Brown (D., Ohio) and Mark Warner (D., Va.) — released a framework Monday also calling for a minimum tax on U.S. companies’ global earnings. Some features of their plan are less stringent than the administration’s version, though other details, such as the minimum tax rate, must still be determined.

“I don’t know about the 28 vs 25% and where we come down,” Mr. Brown told reporters Monday. “I support the 28 personally, but I think we’ll work those things out.”

Other countries will welcome renewed U.S. engagement in negotiations led by the Paris-based Organization for Economic Cooperation and Development, a group of advanced economies. But that won’t guarantee a consensus on creating a global minimum-tax system, said Daniel Bunn, vice president of global projects at the Tax Foundation, a conservative-leaning group.

“You may get countries like France or Germany potentially attracted to the Biden proposal, but I don’t know that you automatically get full endorsement from countries in the OECD negotiations,” he said.

Although countries are working together through the international talks, each has its own set of incentives built into their tax systems: generating revenue, protecting domestic industries and attracting foreign investment.

Countries’ efforts to cut rates have slowed in recent years, stabilizing around the mid-20s, where the U.S. is when state taxes are included. International agreements have pushed countries to link activity and taxation, so it is now harder for companies to put profits in low-tax countries like Ireland without having substantial operations there.

–Andrew Duehren and Theo Francis contributed to this article.

Write to Richard Rubin at [email protected] and Kate Davidson at [email protected]

(END) Dow Jones Newswires

April 05, 2021 18:11 ET (22:11 GMT)

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