FRANKFURT, Germany — How can governments keep multinational companies from avoiding taxes by shifting profits to subsidiaries in low-tax countries?
Years of international discussion over the issue gathered momentum after U.S. President Joe Biden proposed a global minimum corporate tax rate of at least 15% and possibly higher. The Biden proposal has found support among the Group of Seven wealthy democracies, raising the prospect that a new approach to international taxation might be reached this year.
That, at least, is the goal set by the Organization for Economic Cooperation and Development in Paris, which is overseeing talks among more than 135 countries.
Here are some key questions:
WHAT IS A GLOBAL MINIMUM CORPORATE TAX?
Countries would change their tax laws so that if their companies’ profits go untaxed or lightly taxed offshore, the company would face an additional, top-up tax back home to bring its rate up to the minimum.
That would remove the incentive for companies to shift profits to low-tax countries, so the thinking goes, because if those companies escape taxes abroad, they would have to pay it at home anyway. And the minimum would weaken the motivation for countries to enact rock-bottom tax rates to attract companies in the first place.
At home, Biden has proposed raising the U.S. tax rate on companies’ foreign earnings to 21%. This would mark an increase from legislation passed under his predecessor Donald Trump, which had a range of 10.5% to 13.125%. Critics argued that the overseas rate passed under Trump, coupled with exemptions, was too low to deter corporations from profit-shifting.
Even if the U.S. rate winds up above the global rate, the difference could be small enough to eliminate most room for tax manipulation.
HOW BIG IS THE PROBLEM?
For decades, corporate earnings have been migrating to tax havens, often through complex avoidance schemes. From 1985 to 2018, the global average corporate tax rate fell from 49% to 24%. And by 2000-2018, U.S. companies booked half of all foreign profits in just seven low-tax jurisdictions: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland. Though small countries levy a low rate, they may capture what is for them significant revenue.
And there’s some money at stake to be sure. U.S. Treasury Secretary Janet Yellen has asserted that that a global minimum would end a destructive “race to the bottom” in international taxation. According to the London-based Tax Justice Network advocacy group, governments lose $245 billion annually to tax havens. If that money were instead available to governments, they could use it for, among other things, managing their heavy costs for pandemic relief.
HOW DOES THIS AFFECT ORDINARY PEOPLE?
Several ways. Taxes on the earnings of multinational companies are ultimately paid by the shareholders in those companies — a group that is, in general, wealthier than average. As the tax load on corporate revenue has declined, the overall tax burden has tended to shift to wages and labor — in other words, from generally affluent shareholders to ordinary workers. Another reason to care: According to the OECD, large companies that operate across borders enjoy an unfair competitive advantage by capitalizing on international tax avoidance strategies that aren’t available to local-only companies.
HOW DO COMPANIES MOVE PROFITS TO FIND THE LOWEST TAX RATE?
Though some tax avoidance schemes are illicit, most are perfectly legal. Part of the issue is the nature of the modern economy: It is increasingly based on intangible assets, like trademarks, software and other intellectual property. Those are easier to move around than tangible assets, such as factories.
One way of shifting tax liability is through a profit-sharing agreement. This involves assigning a share of costs and profits to a subsidiary in a low-tax jurisdiction. Another way is to attach earnings from copyrighted software or other intellectual property to legal entities in tax havens.
THE DISPUTE OVER ‘DIGITAL’ TAXES
One part of the OECD talks has focused on taxing companies that do business in countries where, often because the companies’ businesses are Internet-based, they have no physical presence and thus pay little or no tax on those sales. France has passed a 3% “digital services tax” on revenue that is deemed to have been earned by big companies in France — a measure aimed at U.S. tech giants like Google, Facebook and Amazon. Other countries have followed suit. Washington, though, has branded such unilateral taxes as improper trade practices that unfairly target U.S. companies.
The Biden administration has proposed to resolve the issue by producing a list of 100 of the world’s biggest and most profitable companies — no matter what their line of business — and letting countries tax them based on their local sales. The idea would be for other countries to repeal their unilateral digital taxes and end the trade tensions they incite.
WHERE DOES THIS PROCESS GO FROM HERE?
Any agreement faces hurdles. One key sticking point could be where to set the global minimum rate. Low-tax countries such as Ireland, which are also part of the talks, may resist a higher rate. Advocates such as the Tax Justice Network say 15% is too low and would severely limit revenue gains.
Another contentious issue is how to define the list of the “biggest and most profitable” enterprises, and how to resolve disputes if countries disagree over what share of their profits each can tax. The G-7 finance ministers who met in London June 4-5 left their position on those issues blank, to be filled in later.
Any deal could come at a meeting of the countries in the OECD process this summer, followed by endorsement by the Group of 20 finance ministers meeting in Venice in July and then a final decision at the G-20 leaders’ summit in October in Rome. Meanwhile Biden would need Congress to approve his proposed U.S. rate.
Even if there’s no negotiated global agreement to sign, coordinated unilateral action by governments could, in effect, impose a minimum tax. If enough major economies that are home to multinationals, like the United States and large European countries, make clear that they will tax profits stashed in tax havens, this could achieve much of what the talks are intended to do.