WASHINGTON – Momentum is clearly growing in the United States and other major economies around the world behind plans to make it difficult for major international corporations to avoid paying taxes in the countries where they are located. But experts warn that much remains to be done to achieve this elusive goal.
Over the weekend, finance ministers from the Group of Seven industrialized nations, which includes the United States, Canada, the United Kingdom, Germany, France, Italy and Japan, agreed in principle to create a global corporate tax plan. Let’s do it. Transfer profits to subsidiaries in lower or tax-exempt jurisdictions to pay up to 15% tax on that income to the state in which they are located.
At the same time, the Biden administration is pushing for a change in the US domestic policy that prevents companies from paying little or no taxes by demanding big tax cuts year after year even while they bring in big profits for their shareholders.
In recent decades, there has been what Treasury Secretary Janet Yellen describes as a “race to the bottom” among developed countries, which have lowered corporate tax rates as a way to entice companies to change their operations or offices in their jurisdictions.
Steven M. Rosenthal, a senior fellow at the Brookings Institution for Urban Tax Policy in Washington, said the meeting of major states to halt the practice is a “very welcome” change.
“Globally, countries need a revenue base to support the services their citizens demand,” he said. The idea that the United States and other countries beg your neighbor in a race to the bottom only undermines each country’s ability to have a strong tax base to support the services its residents want. The sensible approach is coordination.”
While the proposed global minimum tax isn’t something that will take off overnight, the pact among the G7 nations, which as a group has a huge impact as a group on international politics, is seen by experts as a sign that the proposal has a chance of being embraced.
The development is welcome, but only the first of many requests, said Mohamed El-Erian, former CEO of investment management firm Pimco and current president of Queen’s College Cambridge.
Speaking to CNBC Monday morning, El-Erian said, “I think it’s a good idea. I think it’s historic. I think it’s a necessary step toward comprehensive tax reform, but it’s not enough. There are many steps that need to be taken. These include persuading G20 member states to join the That, in addition to the Organization for Economic Co-operation and Development (OECD).
“So treaties have to be approved in national parliaments, so it’s a long process,” El-Erian added. “But that [the G-7 weekend agreement] It was certainly a necessary and historic step.”
To achieve a significant impact, most countries of the world must adopt a minimum global fiscal policy.
While El-Erian acknowledged that there would be resistance from countries like Ireland and Switzerland, which have already used low tax rates to make them international business hubs, El-Erian said pressure from the world’s major economic players would force them to move forward.
“These are small economies and it is very difficult to oppose the G7 or G20 initiative, so they will move forward, but they will continue in a very destructive way and they will find other ways to maintain that competitiveness.”
US corporate tax
As part of the ongoing negotiations on a bill to improve America’s infrastructure, President Joe Biden has proposed raising the corporate income tax rate to increase needed revenue. But he indicated last weekend that he would be willing to accept a different change in the law: the introduction of a minimum corporate tax.
While it appears similar to the global minimum tax — in particular due to the fact that the proposed 15% rate is the same — it is a different proposal in quantitative terms, and has been endorsed by liberal icons including Massachusetts Senator Elizabeth Warren, who challenged Biden for the party’s nomination. Democrat for the 2020 presidential election.
Last month, the Treasury presented the status of the corporate tax floor in an explanation of the department’s revenue proposals, known as the “green paper.”
“Companies are simultaneously able to report significant gains to shareholders in financial reports and reward executives based on these actions, claiming their taxable income is so low that they have no federal income tax obligation,” the document says. “In a typical year, about 120 companies report net pre-tax income of $2 billion or more on their balance sheets, but a significant portion of these companies pay zero taxes or receive a tax refund.”
What Biden is proposing is a rule that would require companies to use their “book” earnings reported to their shareholders as an indicator of their taxable income and prevent their tax burden from falling below 15% of those earnings.
Perhaps the opposition
Just as the G7 proposal is likely to encounter resistance from countries that benefit from lower tax rates, the proposal to introduce a minimum corporate tax rate should encounter problems in Congress.
Senate Minority Leader Mitch McConnell warned last week that any proposal that leads to increased corporate tax obligations would run into problems with Senate Republicans.
“Once you get into this tax-raising zone, you’re going to stir up a huge amount of controversy, so I don’t think it’s going to attract members of my party,” he said Thursday. “My advice to the president and management: Let’s agree on a smaller, but important, fully paid infrastructure.”