Tony Wickenden: Global corporation tax plans put UK in line for £15bn a year
For some time now, there has been general global concern about how large multinational companies operating in the digital space pay (or, more accurately, do not pay) taxes in the countries in which transactions have taken place. place. The countries where the sales are made.
As has happened with many other global initiatives, from the Paris Climate Change Agreement to the World Trade Organization Appellate Body, former US President Donald Trump has proven a obstacle to the efforts of the Organization for Economic Co-operation and Development to combat taxation. avoidance by these multinationals.
The key he threw into the OECD proposals was the suggestion that, for US multinationals, any adherence to minimum corporate tax rate rules should be on a voluntary basis.
One of the consequences of his intransigence has been the emergence of an uncoordinated set of digital taxes from France, Italy and the UK. This threatened to make it more difficult to implement a unified OECD approach, even without Trump’s barrage.
With Trump now out of the political arena (for now at least), the Biden administration has added implementing a global corporate tax floor to its list of unwinding actions.
The US Treasury Department led by Janet Yellen has said it wants to see a global minimum corporate tax rate for the largest companies of 21%, with no payment option.
The proposal is contained in a U.S. Treasury document, The Made in America Tax Plan, released earlier this month, which is the revenue counterweight to the $2.3 billion in infrastructure spending planned in the America Jobs Plan. .
The main tax increase measure in the plan has a familiar sound – a significant increase in the rate of the original corporation tax. While Chancellor Rishi Sunak added 6% to the UK rate, Yellen is aiming for a 7% hike. This would leave the US federal rate at 28% (there are additional state levies). The move would effectively reverse half of the (unfunded) corporate tax cut from 35% to 21% implemented by Trump’s Tax Cuts and Jobs Act.
The proposed tax hike explains the US Treasury’s decision to set a global minimum rate of 21% – it doesn’t want to be undermined by competitors elsewhere in the world.
Meanwhile, the OECD set out its “commitment to addressing the tax challenges of the digital economy” in two documents released for consultation last October. It favors a two-pronged approach:
Pillar one: This establishes new rules on where tax must be paid and creates a new way of sharing taxing rights between countries. The aim of the new mechanism is to ensure that “multinational enterprises (MNEs) that are digital-intensive or in direct contact with consumers” pay taxes where they carry out “sustainable and significant activities”.
Under the current global regime, taxation requires a physical presence in the country where the business is undertaken, which many multinationals carefully avoid in favor of low-tax residency elsewhere.
Pillar two: This is the main interest of the United States – the introduction of a global minimum tax, according to the OECD, “would help countries around the world to solve the remaining problems related to the erosion of the tax base and profit shifting by multinationals. The United States accepts that the rest of the world does not subscribe to the second pillar without also agreeing to the first pillar.
The OECD and US proposals are not identical. The US plan is simpler and, according to some reports, will affect fewer companies (100 vs. 2,300). However, the head of the OECD tax administration says it will generate a similar amount of revenue.
So what happens next? The big question mark is whether Biden can push the measures through the US Congress. If it can, then it seems that some other OECD countries will accept the new treatment of multinationals and, as a corollary, abandon their own digital tax initiatives. Most OECD members will benefit, although some low-tax jurisdictions (eg Ireland, with a corporation tax of 12.5%) will face difficulties.
Biden has a slim majority in the House of Representatives and relies on the vice president’s casting vote to pass tax legislation in the Senate. Unsurprisingly, Republicans strongly oppose it, so any hesitation among a few Democratic members of Congress could derail the initiative.
The past 20 years have seen a steady decline in corporate tax rates. If Biden and Yellen are successful with their proposals, it will mark a significant turning point and could mean a significant amount of money is poured into the UK’s debt repayment strategy in a way that does not increase the burden on UK businesses. who currently pay taxes, but which secures the funds of those who do not contribute as much as they could.
Lobby group Tax Justice UK estimates that these two changes could mean close to £15billion extra a year for the Treasury. This is something I will definitely keep an eye on.
Tony Wickenden is Co-Chief Executive of Technical Connection (a St James’s Place Wealth Management group company).
You can find him tweeting @tecconn