During the G7’s June meeting in Corwall, the US Administration submitted the principle of a universal minimum corporate tax rate, which met great support throughout the least financially-disciplined countries. Here is our quick take about this measure.
What is it?
Without getting into details, the idea is to make all countries agree for corporate profits to be taxed more evenly, regardless of where they are generated, to stop what Janet Yellen called a “race to the bottom”. With a minimum rate of 15%, which the Treasury Department considers a floor and would like to push up, the new system would increase the chance that corporate profits can be taxed, at least in part, where they are generated rather than where the company chose to be headquartered.
Will it be implemented?
Nothing is less sure. Of course, the proposed tax scheme easily won support from the many countries where fiscal discipline is not the main strength. It is also fair to say that it would fix an issue that has grown with globalization and, particularly, the development of international e-commerce. However, a truly universal minimum is unlikely. There are about 200 independent countries in the world and it looks certain that at least a handful of them will want to offer a discounted tax rate, in an effort to attract more corporate registrations.
As a matter of fact, the system will work only if a growing number of key countries adopt an extra-territorial taxation, as the US started to apply in certain areas of its tax schemes. This sounds a remote possibility, given the complex setup that the approach requires and its legal (and sometimes constitutional) implications in each country.
Does it matter for corporation?
Officially, it does not in the USA. Even after Donald Trump cut it (from 35 to 21%), the US corporate tax rate is well above 15%, and the Biden Administration’s plan is to raise it back to 28% … which Amazon said it would welcome! (we wonder why they spend so much time and money optimizing their tax liabilities if their objective is to pay more).
Higher corporate tax rates may be favorable in the short-term (especially if the extra amounts are used by governments to invest in transportation infrastructure and other productivity-friendly initiatives) but, in the longer-term, one should expect corporations to behave rationally: if these higher tax rates are not offset by benefits, they will sooner or later find a legal way around them. Not that long ago, under Barrack Obama’s mandate, it was common to see US companies relocate their headquarters for tax reasons.
Whatever happens, there is an interesting contradiction in this story. A growing number of developed countries are flexing their muscles against internet giants’ alleged anti-competitive practices. With Lina Khan’s appointment to chair the FTC, the USA are not last on the list. In the meantime, however, the same countries are trying to organize their own tax cartel to kill any risk of competition based on tax attractiveness. Nice example of “Do what I say, not what I do”!
HG – July 8, 2021