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.