Momentum is clearly growing within the United States and the world’s other major economies behind plans to make it more difficult for large international businesses to avoid paying taxes in countries where they are located. But experts warn there is still plenty to be done to achieve that elusive goal.
Over the weekend, the finance ministers of the G-7, which includes the U.S., Canada, the United Kingdom, Germany, France, Italy and Japan, agreed in principle to the creation of a global minimum tax on corporations that would force companies that shift profits to subsidiaries in low- or no-tax jurisdictions to pay as much as 15% in taxes on that income to the country where they are headquartered.
At the same time, the Biden administration is pushing a change to U.S. domestic policy that would block companies from paying little or nothing in taxes by claiming large tax deductions year after year even as they report large profits to their shareholders.
In recent decades there has been what Treasury Secretary Janet Yellen characterized as a “race to the bottom” among developed countries, which have slashed corporate tax rates as a means of attracting businesses to move operations or headquarters to their jurisdictions.
Large countries coming together to stop that practice is a “profoundly positive” change, said Steven M. Rosenthal, a senior fellow with the Urban-Brookings Tax Policy Center in Washington.
“Globally, countries need to have a revenue base to support the services that their citizens demand,” he said. “And the notion that the U.S. and other countries are playing beggar-thy-neighbor in a race to the bottom just undercuts each country's ability to have a robust tax base to support the services that their residents want. The sensible approach is to coordinate.”
While the proposal for a global minimum tax is not something that will take off overnight, agreement among the G-7 countries, which as a group have significant influence over international policy, is seen by experts as a sign that the proposal has a chance of being adopted.
Mohamed A. El-Erian, former CEO of the investment management firm PIMCO and current president of Queens’ College, Cambridge, said the development is a welcome one, but only the first step of many needed.
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 towards global tax reform, but it's not sufficient. There's so many more steps to do.” Those include getting the G-20 member nations to sign off on this, as well as the Organization for Economic Cooperation and Development (OECD).
“Then you've got to get treaties passed in national parliaments, so it's a long process,” El-Erian added. “But it [the G-7 weekend agreement] certainly was a necessary step and historic one.”
To have any meaningful effect, a global minimum tax policy would have to be adopted by a majority of countries around the world.
While conceding that there would be resistance from countries such as Ireland and Switzerland, which have effectively used low tax rates to make themselves hubs for international business, El-Erian said the pressure from the world’s largest economic players would force them to go along.
“These are small economies, and it's very hard to oppose a G-7 or G-20 initiative, so they're going to go along, but they're going to go along in a very grudging fashion and find other ways to maintain that competitiveness.”
US corporate tax
As part of the ongoing negotiations over a bill to improve U.S. infrastructure, President Joe Biden has been proposing an increase in the corporate income tax rate to raise the necessary revenue. But, late last week, he signaled that he would be willing to accept a different change to the law: the imposition of a minimum corporate tax.
While this sounds similar to the global minimum tax — and is made more so by the fact that the proposed rate of 15% is the same — this is a quantitatively different proposal, and one that has been championed by liberal icons including Massachusetts Sen. Elizabeth Warren, who challenged Biden for the Democratic presidential nomination in 2020.
The Treasury Department made the case for a minimum corporate tax last month in an explanation of the administration’s revenue proposals, commonly known as the “Green Book.”
“Corporations are simultaneously able to report large profits to shareholders in financial reports and reward executives based on these measures, while claiming that their taxable income is at such a low level that they do not have any federal income tax liability,” the document says. “In a typical year, around 120 companies report pre-tax net income of $2 billion or more on their financial statements but a significant share of these firms pay zero income tax or receive tax refunds.”
What Biden is proposing is a rule that would require businesses to use their “book” profits that they report to their shareholders as a proxy for their taxable income, and prevent their tax burden from falling below 15% of those profits.
Just as the G-7 proposal is likely to face resistance from countries that benefit from lower tax rates, the proposal to impose a minimum tax rate on companies is expected to face difficulty in Congress.
Senate Minority Leader Mitch McConnell last week warned that any proposal that results in increased tax liabilities for businesses is going to run into trouble with Senate Republicans.
“Once you get into this tax increase area, you are going to create an enormous amount of controversy, so I don’t think that’s going to appeal to members of my party,” he said Thursday. “My advice to the president and the administration: Let’s reach an agreement on infrastructure that’s smaller, but still significant and fully paid for.”