In April 2021, the Biden administration published an overview of its proposed changes to US corporate tax policy, the so-called “Made in America” tax plan. This includes a proposal to set up a "Global minimum tax " on corporations, potentially bringing the US fully on board, with efforts so far mainly led by international organizations in wealthy countries, including the G-20 and the Organization for Economic Co-operation and Development (OECD).
According to the OECD, countries around the world are losing an estimated $ 100 billion in tax revenue annually to these “base erosion and profit shifting” maneuvers that negatively affect the competitiveness of tax authorities.
These plans would set a global minimum corporate tax rate of 15%. They would also force giant multinational corporations to pay taxes in the countries where they sell their goods and services instead of the lower-tax countries where they routinely shifted their profits. The Biden government claims its actions would end a race to the bottom in which nations have lured big corporations to their shores by undercutting other countries' corporate tax rates.
The Tax Cuts and Jobs Act (TCJA) of 2017, which was largely favorable to corporations, including multinational corporations, contained some provisions in order to make international profits. It introduced the global low intangible tax rate (GILTI) of 10.5%, which was intended to serve as the minimum tax on offshore profits. And it tried to curb the practice of US companies paying high interest and royalties to overseas subsidiaries to lower their US tax burden. Under the Biden administration, the White House tabled plans to revise parts of the 2017 tax law, including the GILTI regime. Among other things, it would calculate the tax rate per country so that companies would not try to settle their German tax bill with their Swiss one, and increase the minimum tax rate to 21%.
However, the evidence following the 2017 corporate tax rate cut from 35% to 21% showed no increase in investment or economic growth versus trend levels, with analysis concluding that “There is no evidence that the 2017 Tax Act made a significant contribution has done ". Indeed, an International Monetary Fund (IMF) report found that less than a fifth of the increase in corporate cash balances improved by the corporate tax cut is spent on investment and research and development (R&D) spending has been. Instead, the company's increased cash holdings were used to fund buybacks and dividend payouts to shareholders.
Over the past few decades, a number of countries have introduced tax policies specifically aimed at attracting multinational corporate investment by lowering corporate tax rates. This in turn has led other countries to lower their tariffs as well in order to remain competitive. In response to the incentives created by these laws, many multinational corporations have relocated their assets, particularly intellectual property, to countries that offer them low or even no tax treatment of the income from those assets.
What is a global minimum tax?
A global minimum tax defines a system whereby a company from a given country pays at least a certain percentage of its profits in taxes, regardless of where in the world those profits are made. Basically, it would set a minimum tax rate on profits regardless of where they come from.
In a country that has a global minimum tax rate, a domestic company that relocates part of its business to a low-tax area abroad would have to pay the government of its home country the difference between that minimum tax rate and what the company paid on its foreign profits.
For example, if a company is located in a country with a minimum global tax rate of 25% that generates profits abroad that have been taxed at 15%, it would be entitled to charge the company an additional 10 to bring to the minimum tax%.
The Made in America Tax Plan
The current corporate tax system contains incentives for companies to move their production and profits abroad. Falling corporate tax revenues are hindering the US from funding investments in infrastructure, research, technology and green energy.
The Made in America Tax Plan implements a number of corporate tax reforms to address profit shifting and offshoring incentives, and to level the playing field between domestic and overseas companies. These include:
- Increase in corporate tax rate to 28%;
- Strengthening the Global Minimum Tax for US Multinational Corporations;
- Reducing the incentive for foreign jurisdictions to maintain extremely low corporate tax rates by encouraging the introduction of robust minimum taxes worldwide;
- Adopt a minimum tax of 15% on book income from large companies that report high profits but have low taxable income;
- Replacing flawed incentives that reward excess profits from intangible assets with more generous incentives for new research and development;
- Replace fossil fuel subsidies with incentives for clean energy production; and
- Reinforce enforcement to combat corporate tax avoidance.
These are the key elements of the Made in America tax plan, but the proposal includes several additional tax incentives that would benefit US corporations, transit companies, and small businesses directly. These include, for example, a significant increase in available funds through the building tax credit for low-income and other housing incentives.
The current premise – tax reforms
More than a decade has passed without the global tax system being brought into the modern age. But less than three months after taking office, President Joe Biden has raised hopes of a breakthrough with proposals that could kill tax havens and force multinational corporations to pay a fairer share of taxes.
According to proposals presented to tax negotiators from 135 countries to the OECD, the Biden Plan would force large corporations to pay taxes where their income is generated rather than where profits can be shifted. It would also set a global minimum tax rate agreed by the world's largest economies.
The free market economies would have argued for the advantages of globalization: cheaper products, more choice. But the shifting of profits by large companies – charged in the digital age with their unprecedented ease of doing business across borders – has made public coffers increasingly tight. According to the Tax Justice Network, treasury losses around the world have risen to $ 436 billion annually.
This comes at a time when Covid is driving national debt to staggering levels. Since the financial crisis of 2008, public anger over tax avoidance and demands for fair participation by companies have also increased.
In a race to the bottom designed to lure large corporations into competing jurisdictions, the average statutory corporate tax rate in 109 countries, as assessed by the OECD, fell from 28% at the turn of the millennium to 20.6% in 2020. For Biden, the end of the The race to the bottom would help his government increase domestic corporate taxes from 21% to 28% without the threat of large corporations relocating and relocating their profits.
Much remains to be negotiated, not least about the rate at which a global minimum tax is to be set. Washington wants 15%, but several nations have much lower rates. An agreement between the EU countries would not be easy, as the quotas range from 9% in Hungary and 12.5% in Ireland to 33% in France.
There are concerns that if the US tightens the rules and other countries fail, it will falter. The concern is that when the US has a minimum tax and no one else in the world has a minimum tax, there is a disadvantage to being a US company versus being a company based in another country.
The Biden government's plan appears to be trying to pull other countries along in their attempt to further cut corporate taxes and make it more attractive. According to US Treasury Secretary Janet Yellen, competitiveness is more than how US-based companies hold their own against other companies in global merger and acquisition offers. It is about ensuring that governments have stable tax systems that generate sufficient income to invest in essential public goods and respond to crises, and that all citizens share the burden of public finance fairly.
This column does not necessarily represent the opinion of the Bureau of National Affairs Inc. or its owners.
Information about the author
Abishek Goel is a founding partner of Finex Advisors.
Bloomberg Tax Insights articles are written by seasoned practitioners, academics and policy experts who discuss developments and current issues in the tax arena. To make a contribution, please contact us at [email protected].