In mid-May, the Biden administration formally endorsed a minimum global corporate tax rate of at least 15%. The US proposal would be limited to the 100 largest companies in the world – those with revenues exceeding $ 20 billion. The proposal would not depend on the nationality of the company (the US has made it clear that it will not support any discriminatory proposal against US multinationals) and, since it would apply to digital service companies as well. than to those who sell tangible goods, would not be sector specific.
Air in the sails of the OECD?
The OECD has negotiated a new global tax deal to tackle âbase erosion and profit shiftingâ. These negotiations revolve around two pillars. Pillar 1 would allow destination countries to impose taxes on multinationals selling goods or providing services within their borders, rather than limiting the ability to tax to countries in which these companies are headquartered or have their headquarters. physical presence (this pillar is seen as having particular relevance for digital service companies). Pillar 2 would introduce an overall minimum corporate tax rate, which would be implemented through a combination of controlled foreign company rules and under-taxed payment rules.
Why the Damascene conversion?
Under the previous administration, US support for the OECD’s efforts was mixed at best and motivated, in large part, by a desire to prevent digital service taxes (DST), which were seen as discriminatory to the United States. against American multinationals. DST’s proposals remain a concern for the Biden administration, but the renewed and strong US support for global minimum taxes gives new impetus to the OECD’s efforts. An agreed minimum global corporate tax level would help level the playing field for U.S.-based multinationals if the U.S. corporate tax rate were increased above the current rate of 21% ( at 28% as proposed to pay for the US plan for employment).
While there was general (including EU) support for a 15% minimum corporate tax, the US suggestion was higher than the OECD Pillar 2 rate that had been considered ( apparently 12.5%). Many countries see their ability to set a lower corporate tax rate as a key component of their economic attractiveness to international investors.
Of particular note is the current corporate tax rate in Ireland of 12.5%. Dublin argues that small countries (including Belgium, the Netherlands and Luxembourg) must be able to use tax policy as a legitimate political lever to offset the advantages of scale, resources and location enjoyed by big countries – if big countries are struggling to compete, they should lower their tax rates, rather than forcing small countries to raise theirs. The reforms in pillars 1 and 2 would force Ireland to think about how to manage a potential reduction of 2 billion euros per year in the collection of corporate tax and reform its industrial strategy to offer businesses international organizations a reason to continue to establish themselves there, beyond a low rate corporate tax.
But even a 15% rate would remain internationally competitive – lower than the current US corporate tax rate of 21% for its global multinationals (which is itself double the current minimum tax of 10.5% of the United States on the global low-tax intangible income of American companies – GILTI) and well below the new American rate proposed by the administration of 28%. And the UK (traditionally Ireland’s closest competitor for US business investment), facing the dual impact of leaving the EU and the biggest economic blow from the coronavirus of any G7 country , has already announced its intention to increase its corporate tax rate to 25%.
Although the US 15% minimum proposal has changed the mood (Japan, Australia, the EU and some of the larger member states have welcomed the threshold), headwinds persist. For example, any comprehensive tax deal would need the support of the EU. The implementation of the tax directives would require unanimity and the EU’s record is not strong in this area – attempts to unify corporate taxes have stalled since 2011â¦
Furthermore, although it is now possible to reach agreement on Pillar 2, there is no apparent solution to the controversial Pillar 1 question about where businesses (especially digital service companies) will be required to pay taxes. The French Minister of Finance declared on May 26: âone condition is to have all the major [important] digital businesses, being included in the scope of the tax â- US acceptance of any change in this area is conditional on insisting that the approach should not discriminate against US multinationals .
For its part, the EU has indicated that it does not see an OECD deal as an obstacle to its digital tax proposal and plans to push forward on a proposal later this month; and a number of non-EU countries have already imposed or are planning to introduce a digital services tax (including the UK, Brazil, Indonesia, India and Turkey).
Agreement on the Horizon?
Despite these potential obstacles, G7 finance ministers apparently made good progress in discussions at the end of May and aim to announce a common position at their formal meeting on 4-5 June. This would allow G7 leaders to sign a deal at their summit in mid-June. This in turn would put pressure on the G20 to agree to the plan at its meeting at the end of July – although many commentators see October as a more realistic timeline.
Overall, despite objections, it seems likely that the US proposal for a minimum overall corporate tax rate of 15% will be accepted at the G20 summit. If so, it will be taken as an indication that the international community is capable of working together and finding solutions to complex trade problems. If the proposal is accepted, it will have implications for multinationals (which may face higher tax bills) and for countries (which may see their competitive tax advantage eroded).