A step forward in global corporate tax reform
The US offer to reform international corporate taxation is good news. The compromise discussed would not only be a victory for multilateralism and break the impasse that has seen the proliferation of ad hoc digital taxes. It would also be a way to ensure that companies visibly pay their fair share as the world begins to recover from the pandemic.
The global corporate tax system, as enshrined in international treaties, has long been in need of an overhaul. It was created at a time when capital investment meant spending on physical assets such as factories or farms with a presence in a defined location. But it has struggled to cope with the rise of “intangibles” where assets can be where a company decides. This encouraged a “race to the bottom”, with smaller countries vying to offer the lowest rate to attract multinationals.
US President Joe Biden’s latest offer is based on the two pillars suggested by the Organization for Economic Co-operation and Development, the rich-country think tank. The first would establish a “right to tax” for countries based on the share of sales of “consumer-facing” businesses in their territory. This would, among other things, allow European countries to tax the profits of American tech giants like Apple or Facebook more.
The other pillar would create a new global minimum rate. Governments could require companies to top up their payments until they reach this agreed level. It would prevent a “begging for your neighbour” approach that could undermine the Biden administration’s attempts to fund its social and infrastructure spending through a national corporate tax hike – which could otherwise lead big business to move more towards tax havens.
A pact between the big rich countries would allow Europeans and Americans alike to get what they want. It would also allow Biden, and his Treasury Secretary Janet Yellen, to show that the hard edges of globalization can be ironed out better through engagement with allies than his “America First” policy. predecessor. Donald Trump has blocked a deal, seeing it as just an excuse for Europe to target US companies. For their part, France and the United Kingdom have launched new unilateral taxes on digital services; India is also tightening its taxes on foreign tech companies.
Europe should now embrace the US proposal and make the most of this opportunity. As part of the compromise, the United States wants to extend the scope of the OECD package to all large international companies. This could mean that European multinationals, from German automakers to French luxury goods makers, are paying more. Focusing only on the biggest companies isn’t perfect, but it is simple and would move the world a substantial distance in the right direction.
As an overall minimum, the 21% rate suggested by the Biden administration is too high. A lower tier would still give governments the effective autonomy to set higher rates if they so choose, especially with the new sales-based tax rates in place. Governments should not be tempted to view corporations as an inexhaustible source of politically convenient tax revenue: ultimately, all taxes levied on corporations are paid either by consumers, shareholders or workers.
There are, however, economic gains to be made from a new international agreement. Clear global rules on how corporations should be taxed can reduce the incentive to engage in unnecessary efforts to game the system. While corporate taxes are inherently distortive, businesses need a social license to operate; contributing to the services provided by the government on which they depend is part of it. A global minimum corporate tax must also reflect a compromise on these principles.
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