The US Department of the Treasury offered to accept a global minimum corporate tax rate of 15% during international negotiations. There has been talk among leaders around the world to finalize an agreement on a global minimum tax, based on the “Pillar Two” proposal from the Organization for Economic Cooperation and Development (OECD). The agreement would limit tax competition and “race to the bottom” on corporate tax rates by giving a minimum on tax rates applied to cross-border investment by large multinational corporations.
15% and “Race to the Bottom”
Originally, the Treasury proposed a 21% minimum for US multinational firms but offered to accept the 15% tax rate after negotiations. The Treasury said in a statement that “15% is a floor and that discussions should continue to be ambitious and push that rate higher” and that the department told the “steering group” that the “global minimum tax rate should be at least 15%”.
A global minimum tax is meant to prevent companies from moving liabilities and investments to countries with the lowest taxes. Setting a floor prevents countries from competing to have the lowest tax rates to avoid offshoring.
Biden Administration Finances
The Biden Administration has looked to corporate taxes to help fund its spending projects. Biden assumes $1.7 trillion in revenues over 15 years to pay for new spending over eight years. Biden also plans on using increased tax enforcement, getting rid of inheritance tax breaks for wealthy families, unspent COVID-19 relief funds, and getting rid of oil and gas subsidies. In short, part of the reason for the push for a global corporate tax rate is due to increased government spending.
Biden originally planned on raising corporate tax rates as high as 28% but offered to scrap the tax hike after negotiations with Republicans. In return to a minimum of 15% on all companies, Republicans are supposed to agree to at least $1 trillion in new infrastructure spending. It is unsure whether the new infrastructure bill will go through or not.
Biden’s 15% tax floor seeks to stop large, multinational companies like Amazon from paying little to no US taxes. In the plan, companies are to be taxed irrespective of where they are headquartered. Many of these companies show large profits on earing statements but shift their liability to countries with much lower taxes. Companies also work to dodge taxes by locating themselves in tax havens.
So far, the G-7 countries to a global corporate tax of 15% to curb tax avoidance. Canada, France, Germany, the UK, Italy, Japan, and the US have agreed, and “want [the tax minimum] to work and not be filled with loopholes” according to Treasury Secretary Janet according to Treasury Secretary Janet Yellen.
The next step will be for the plan to win support among the G-20 countries, which include China, India, Brazil, Russia, Saudi Arabia, and South Korea. The G-20 finance ministers and central bank governors are scheduled to meet in Venice, Italy in July. It is unclear whether that tax plan will win the support of the 19 member nations and European Union, because some of the G-20 members keep corporate taxes relatively low in an effort to lure business.
Will a Global Minimum Work?
Critics of the global minimum corporate tax have claimed that companies can still find ways to skirt the taxes and that many American businesses want lower tax rates. Companies that have the biggest problem with the minimum tax rate are those that have been accustomed to receiving tax rates lower than 15%. The international pressure for a 15% minimum tax may also disadvantage smaller and less developed countries that use a low tax rate as a selling-point to attract business.
For the global minimum corporate tax to work, members need to uniformly apply it and not work at cross purposes. The G-20 still needs to approve the minimum tax in their meetings in July and October and the 139 countries in the OECD’s Inclusive Framework have to sign on. Countries around the world must follow and enforce the tax. Otherwise, companies will look to countries with lower taxes and tax havens. With more and more countries following the protocol it will look more and more tempting for countries to skirt the minimum tax in an effort to attract business.
There are also questions about how the tax will be paid and collected. Firms will stop making certain investments for a time due to the uncertainty involved in a new tax plan. There have already been some issues in the enforcement, including Switzerland’s subsidies on multinational corporations to offset the 15% tax.
Overall, it will be difficult to get so many countries to agree to the tax and violating the tax will become more and more tempting due to supply and demand constraints. Companies may find loopholes, though it will be difficult with some of the most powerful countries signed on.
Written by: Miranda Smith