G-7 Approves Corporate Tax Floor

A major first step to solving a longstanding global issue.

Jeff Stein and Antonia Noori Farzan for WaPo:

The G-7 group of advanced economies announced an historic accord to set a minimum global corporate tax rate on Saturday, taking a first step to reverse a four-decade decline in the taxes paid by multinational corporations.

The deal reached at the G-7 meeting in London by Canada, France, Germany, Italy, Japan, the United Kingdom, and the U.S. is a major breakthrough for the Biden administration’s efforts to enact a floor on the taxes paid by corporations worldwide.

Treasury Secretary Janet Yellen has been adamant that the U.S. needs to work with other countries to prevent firms seeking lower tax obligations from simply moving elsewhere. Corporate tax rates across the globe have fallen dramatically over the last four decades.

Alan Rappeport of NYT describes it as “a new global minimum tax rate of at least 15 percent.”

Yellen has been pushing this to end the so-called “race to the bottom,” wherein tax havens like Ireland set their rates very low to encourage multinationals to shift their revenues to Dublin through accounting gimmickry.

But it’s not all a win for the US. WaPo:

Under the deal, the U.S. is expected to give up some taxing rights on overseas profits of U.S.-based tech giants.

The deal enables countries to tax 20 percent of the profits of “the largest and most profitable multinational enterprises” that have profit margins of at least 10 percent.

While the agreement does not explicitly name tech companies, the line is a nod to the push by European countries to levy taxes on the operations in their countries of firms such as Apple and Amazon, which are headquartered in the U.S. but reap significant revenue abroad. The Europeans insist that it is unfair for the Internet behemoths to collect revenue in their countries without paying more in taxes.

The U.S. objected to singling out tech companies in the deal. Yellen said that as a compromise the G-7 finance ministers agreed to apply the change to a broader set of multinational firms that the tech firms “would qualify by [under] any definition.” The deal does not define which firms would be affected. That pact will move in tandem with the deal for a global minimum tax.

So, while the floor is 15 percent, it rises to 20 percent for , as the NYT report describes it, “large businesses with a profit margin of at least 10 percent.”

I’m confused, however, about this, from the WaPo report:

The Biden administration is seeking to raise the domestic corporate tax rate from 21 percent to 28 percent to pay for its spending priorities, such as infrastructure and education.

Republican critics have charged that the move would lead American firms to relocate abroad, hurting domestic jobs and investment. The international tax agreement helps the White House argue that it can lift domestic tax rates without pushing multinationals abroad, because under the agreement they would still face a minimum level of taxation.

If the floor is set at 15 percent, the race to the bottom might be over—but the finish line is at 15 percent. It’s not at all obvious how that enables a rise from 21 to 28.

Further, the deal is nowhere close to being operationalized. WaPo:

The deal starts what is expected to be a long and arduous process toward changing international tax laws. Negotiators hope to advance progress toward a binding agreement at a meeting of leaders of the Group of 20 in Italy in July.

Yellen told reporters that negotiators then hope to move toward a final deal this fall. But there are a number of sticking points. The deal faces opposition from countries, including Ireland, which rely on revenue by acting as tax havens, and the new U.S. tax rules have to be approved by Congress.

International treaties require passage by a two-thirds majority in the Senate, meaning GOP votes will be necessary to ratify changes pushed by the Biden administration. Republicans have criticized the Biden effort, with Sen. Mike Crapo (R-Idaho), the top Republican on the Senate Finance Committee, warning that the U.S. “should not be willing to accept an agreement that continues to target American companies.”

“Republicans are unlikely to go along with this — you’re ceding tax authority and doing so in a way that disproportionately hurts U.S. companies,” said Donald Schneider, who served as chief economist to Republicans on the House Ways and Means Committee.

It is unclear how much support the new tax floor has in parts of the European Union and other low tax countries. Irish finance minister Paschal Donohoe has said he has “significant reservations” about the U.S. plan and said the country will maintain its 12.5 percent corporate tax rates for years to come.

Even if we handwave the Senate and Ireland, this would just be a floor in the EU, UK, and US. What’s to stop other countries from filling the tax haven gap? The NYT report notes that China, which is a member of the G-20 but not the G-7, is unlikely to join but adds, “Finance officials believe that if enough advanced economies sign on, then other countries will be compelled to follow suit.”

Assuming this all somehow gets enacted into law and corporations don’t figure out new ways to shift their tax burdens, though, we’re talking big sums here. According to the NYT report,

A report this month from the EU Tax Observatory estimated that a 15 percent minimum tax would yield an additional 48 billion euros, or $58 billion, a year. The Biden administration projected in its budget last month that the new global minimum tax system could help bring in $500 billion in tax revenue over a decade to the United States.

Tyler Cowen is, not surprisingly, skeptical.

One perennial question is whether the 15% rate is defined over gross or net income.  You don’t want to tax gross income, especially if the business under consideration actually is making a loss.  In any case, you basically end up taxing business income acquisition per se.

If it is net income you are taxing at minimum 15%, you haven’t done as much to limit tax arbitrage as you thought at first.  Especially if the multinational and its subsidiaries engage at arm’s length transactions with shadow pricing, etc.  Net income is a major object of the actual manipulations, and would become all the more so under this new plan, assuming it is applied to net income.  Won’t countries wanting to play the tax haven game end up with very lax definitions of “net income”?  (Or for that matter gross income?)  Or does that get regulated as well?

He also agrees that the 15 percent floor would likely also become the ceiling.

FILED UNDER: Economics and Business, World Politics
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. drj says:

    What’s to stop other countries from filling the tax haven gap?

    The idea is that this minimum 15% tax rate is being applied to the profits as actually achieved in each tax jurisdiction.

    So if a company nets $400m in profits in the the US by selling to US customers, it must pay at at least $60m in corporate taxes (on this profit) to the IRS. The company cannot decide to pay a lesser amount to the tax authorities of e.g. the Cayman Islands.

    If the floor is set at 15 percent, the race to the bottom might be over—but the finish line is at 15 percent. It’s not at all obvious how that enables a rise from 21 to 28.

    If a company active in the US must pay in the US, it becomes possible (for wealthy markets such as the US) to increase the corporate tax rate. Because what is a company to do? Abandon the US market (with its 330m wealthy consumers) for that of the Cayman Islands (with its 66k much poorer consumers) because the local corporate tax rate is lower over there?

    Of course, the devil is in the details. But, in principle, this is a huge deal.

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  2. James Joyner says:

    @drj:

    The idea is that this minimum 15% tax rate is being applied to the profits as actually achieved in each tax jurisdiction.

    I’m by no means an expert in this but hasn’t that always been the rub? Apple isn’t making its profits in Ireland now but has been able to show them there via creative accounting.

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  3. drj says:

    @James Joyner:

    I’m by no means an expert in this but hasn’t that always been the rub? Apple isn’t making its profits in Ireland now but has been able to show them there via creative accounting.

    Yes. But if you have the US, the EU, and Japan saying collectively no to such shenanigans that will change things dramatically.

    No major multinational wants/can afford to be shut out from all of these these markets.

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  4. de stijl says:

    Joyner: Yo! murica!

    drj: Ssh, fool.

    Ba-bam. I love facts.

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  5. drj says:

    In addition to my previous comment, Japan doesn’t even matter that much. It’s the US and EU (two of the world’s three economic and regulatory superpowers – the other one is China) that made this deal – not so much to set a global standard as to dictate terms for market access to their respective consumer bases without starting a trade war.

    If other countries don’t want to join, that’s fine. What’s China to do? Tell locally based companies that they are not allowed to comply with local tax rules; and thus, can no longer sell to either the US or the EU?

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  6. drj says:

    No edit button.

    I should have said:

    What’s China to do? Tell locally based companies that they are not allowed to comply with foreign tax rules; and thus, can no longer sell to either the US or the EU?

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  7. drj says:

    Since I can’t seem to shut up about this topic, the actual, long-term & strategic target of this agreement is China.

    Tax havens are just the low-hanging fruit that needs to get out of the way first.

    As I mentioned, this deal is not so much about global standards as about market access.

    And when it comes to market access, China is a bad actor: they’re happy to sell to you, but you can’t sell to them unless you hand over partial ownership, technology, or both.

    Using its newfound wealth, China is also engaged in a competition for economic power and strategic influence with both the US and EU.

    What the Biden administration and EU are trying to do, is to use the economic gravity of their domestic markets to make that fight fairer, to prepare for jointly shutting out China if it doesn’t want to play by the same rules as its economic peers.

    In other words, this initial agreement is a good basis for strengthening the long-term national security of the US – which makes it almost a given that the GOP will denounce it.

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  8. Just nutha ignint cracker says:

    The key to the whole issue is the phrase “two-thirds majority in the Senate.” It’s not gonna happen unless Donald Trump (or his clone) supports it in 2024 as POTUS–and maybe not even then, depending on what the remaining Koch, Adelson, and Mercers feel about paying taxes. [ETA (!!!): My guess is that they’re ambivalent at best about paying them.] This issue is rated “strong sell.”

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  9. Mu Yixiao says:

    @drj:

    It’s the US and EU that made this deal

    No, it wasn’t.

    Canada, France, Germany, Italy, Japan, the United Kingdom, and the U.S.

    That’s 3 countries out of 27 that make up the EU. And the EU itself is a completely different political entity.

    I may be at the left end of the bell curve when it comes to political knowledge in this forum, but even I understand the difference between “a country in Europe” and “The European Union”.

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  10. drj says:

    @Mu Yixiao:

    even I understand the difference between “a country in Europe” and “The European Union”.

    Not for the first time, you understand rather less than you think.

    Why do you think both the WaPo and James Joyner call attention to Ireland’s opposition to the deal? Ireland is not in the G7, now is it?

    How do you think a minimum corporate tax rate will be enforced? Ultimately (duh), by refusing entry (at a customs border) to products and services produced by an entity that is located in a tax haven.

    It so happens, because of the EU (duh), that there is no customs border between Ireland and and all the other EU countries. Which means that if Germany, France, and Italy want a meaningful minimum corporate tax rate, all other EU countries, including Ireland, must be on board.

    In fact, individual EU countries can’t make up their own customs rules, as international trade is a joint EU rather than national competency.

    Fortunately, it so happens that the G7 meetings not only include representatives of its individual member states, but EU representatives as well. What a coincidence!

    Even more of a total, completely unrelated coincidence: just before the US and EU (as well as Japan and some other economic minnows) reached an agreement on a minimum corporate tax rate, the two economic superpowers in the G7 suspended mutual punitive tariffs related to the Boeing-Airbus state aid dispute.

    They even released a joint statement that included the following paragraphs:

    The EU and the US are committed to reach a comprehensive and durable negotiated solution to the Aircraft disputes. Key elements of a negotiated solution will include disciplines on future support in this sector, outstanding support measures, monitoring and enforcement, and addressing the trade distortive practices of and challenges posed by new entrants to the sector from non-market economies, such as China.

    These steps signal the determination of both sides to embark on a fresh start in the relationship.

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  11. JohnSF says:

    @Mu Yixiao:
    @drj:
    It was France, Germany and Italy as formal signatories; however it was also EU consensus policy (despite Ireland’s ambivalence). The other persons present at the summit were EU Economy Commissioner Paolo Gentiloni, Eurogroup President Paschal Donohoe, World Bank President David Malpass, and OECD, IMF and FSB reps.
    The interesting thing from the EU politics p.o.v. is the continued Irish recalcitrance.

    And the big short term target is perhaps not so much China as the UK. Most of the world’s tax havens today are little more than nameplates for the “wealth funds” run out of the City of London.

    The big issue re. China is not so much tax avoidance (much though it’s elite love it personally, their corporates aren’t major players in this field) as intellectual property and the nasty, barely hidden, political side-deals in their investment/debt offers to poorer countries.

    But that said, it is a significant step towards a renewed Washington/Brussels(aka Paris/Berlin/Rome)/Tokyo governance alliance.

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  12. drj says:

    @JohnSF:

    The interesting thing from the EU politics p.o.v. is the continued Irish recalcitrance.

    I suspect that the calculation in Brussels/Berlin/Paris, etc. is that Ireland will have to capitulate on this issue – especially after the EU’s strong support for Ireland’s asks during the Brexit/NIP negotiations.

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  13. JohnSF says:

    @drj:
    I think Dublin’s consensus is “Ah well, all good things must come to an end.”
    Some corps may move out; but Ireland has genuinely established itself as a European finacial centre. If the UK was still in the EU, it might have been more painful; but for a lot of external companies who want an EU HQ, like an English speaking locale and the legal system, hey, why move?
    Seeing as London is now external to the EU, which may matter, going forward, they may calculate.

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  14. Lounsbury says:

    As an EU operator I should say that the Mu Yixoa skepticism of taking the big lads signatures as overly indicative of EU level engagement is not as misplaced as the Americans comments would have it. It is hardly only Ireland that is ralcatricant although they are most visibile, the Dutch, and a number of others are also in the background not really on the Paris-Berlin playbook’s page.

    This said the 15% baseline is not a bad number.

    As for the Libertarian American reaction embodied in Tyler Cowan, this strikes me as somewhat precious given the floor has previously been more or less zero with fees or rates in the lowish single digits found in the pure off-shore zones (example Iles Maurice, Seychelles). Equalization rules that have started to be applied can address this although nothing is perfect.

    Rather than Net versus Gross as he evokes it is what standards for Net as of course manipulation and tax breaks can quite substantially massage Net.

    One does have to start somewhere and while I have unashamedly myself structured using things like the Double Irish, frankly less effort into sterile tax gaming and more into real investment I would not find displeasing if some reasonable standards are set. Of course there is also the matter of trying not to be grotesquely myopic and incompetent as the US was in its 2017 tax law, which utterly bungled things.

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  15. Lounsbury says:

    As a for content, I should recommend The Economist arty referenced by Cowan, written by Madame Keynes (https://www.economist.com/finance-and-economics/2021/05/13/what-could-a-new-system-for-taxing-multinationals-look-like) it is rather better than Cowan’s note.

    However regarding the claim @drj that this is aimed at China, that does not make sense. China is not a tax driven destination and no one in their right mind given PRC habits and demonstrated high-handedness would use any PRC controlled geography as their off-shore centre.

    Many things in economic policy now are indeed aimed at China, but for corporate taxation issues of this nature, China is a non-issue and virtually a non-player.

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