Global corporate tax rate edges closer as Biden shifts target

The prospect of a global minimum corporate tax rate has strengthened after the US put forward a lower rate than it had been seeking at meetings of members of the OECD late last week.

The Biden administration surprised everyone last month when it announced it would seek a global minimum tax rate of 21 per cent, re-energising the OECD’s long-running but less-than-successful attempt to gain support for similar proposals among the near-140 odd countries involved in its discussions.

After pushback from low-tax jurisdictions such as Ireland (which has a corporate tax rate of only 12.5 per cent) that have used low taxes to attract multinational activity, the US has amended its proposal, dropping the minimum rate it advocates to 15 per cent.

US President Joe Biden has lowered the proposed global corporate tax rate.Credit:Abaca

While that still won’t placate Ireland or Hungary (a tax rate of 9 per cent) it has been welcomed by the major European economies.

It would, of course, still have to run the gauntlet of a US Congress where there is opposition within a large and mainly Republican base to a proposal that would impact US multinationals more than those of any other country. Almost half the top 100 multinationals initially targeted by the proposal are US companies.

The US decision to re-base its proposal is pragmatic at a number of levels.

There is a recognition in the US and elsewhere that none of the larger economies wins from a competition to have the lowest corporate tax rate or from incentives to route income through tax havens. They all lose from a race to the bottom that erodes their corporate tax bases.

The US is also acutely aware that in the absence of a global agreement there has been unilateral actions against companies that have large customer bases in one country but divert their tax liabilities, if any, to another.

The rise of the digital economy, dominated by US companies, has caused a number of countries – France, Italy and the UK – to impose their own digital services taxes, with others (including Australia) foreshadowing similar moves if there is no global agreement on tax.

That could cause revenue leakage for the US, undermine the competitiveness of its digital giants and add complexity and cost to their affairs.

Interestingly, even though US companies would be most affected by a global minimum tax rate, they are generally in favour of the proposal – as long as it displaces other specific taxes like the digital services taxes.

The other very significant influence over the Biden administration’s enthusiasm for a floor under the global tax system is its own attempt to increase the US corporate tax rate from 21 per cent to 28 per cent to help pay for its hugely-expensive social and economic agendas.

The pandemic has hit government budgets hard and the US isn’t alone in looking to increase corporate tax rates to help stabilise its public finances. The UK, for instance, had reduced its tax rate to 19 per cent and, pre-pandemic, planned to reduce it further but has now announced it will lift the rate to 25 per cent to help pay for its pandemic response.

The risk for governments raising their taxes is the increased incentive it would provide for tax arbitrage and the loss of corporate activity and tax revenues.

The Trump administration introduced a minimum corporate tax rate of 10.5 per cent to try to encourage US companies to repatriate the trillions of dollars they held in offshore tax havens while lowering US company taxes.

Dropping the proposed tax rate and initially targeting only the top 100 multinationals … could increase global government revenues by an estimated $US100 billion a year or more.

The Biden administration needs a higher rate because it is lifting, not lowering, corporate taxes.

By reducing the proposed global minimum rate from 21 per cent to 15 per cent while raising the US tax rate it might make tax arbitrage more attractive than it would have been at the higher rate (albeit less attractive than it is without any global minimum), but it would also lower the risk of making US companies less competitive in global markets.

The rate of tax is only part of the equation if the erosion of corporate tax bases is to be halted. The more complex issues are where corporate profits should be taxed and how the tax regime might be enforced.

The Europeans, the UK and others want to see multinationals’ profits taxed where their sales are rather than how they have structured themselves.

Some in the US see that as a threat to US corporate competitiveness and a very targeted attack on the US digital giants but it is obvious that the rise, and rise, of the digital economy dictates a rethinking of global tax treaties and treatments to respond to the new reality that the most valuable assets in the 21st Century are intangible.

Digital assets and the income they generate aren’t easily confined by borders. To be effective, a global tax and enforcement regime is required.

To enforce/encourage the adoption of a global minimum tax rate the Biden administration has proposed targeting corporate income that has been generated/shifted to a country that doesn’t have the minimum tax by denying corporate deductions for the income generated there. That’s an approach also favoured by other large OECD members.

Dropping the proposed tax rate and initially targeting only the top 100 multinationals makes it more likely that the OECD members will agree to the proposal, which could increase global government revenues by an estimated $US100 billion a year or more.

It would, however, be only an initial, albeit fundamental step. In revealing its new position the US Treasury Department said it understood that “15 per cent is a floor and that discussions should continue to be ambitious and push that rate higher” if corporate tax rate competition and tax base erosion is to be ended.

If the OECD can get the principles and mechanisms agreed and established – the Europeans are hopeful an agreement can be struck this year – the global tax net could be enlarged and, if the “race to the bottom” on taxes were arrested, governments could contemplate, as the US and UK are now doing, raising taxes without the fear of activity and income being diverted to low-tax and no-tax jurisdictions.

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