The Biden administration in April 2021 released an outline of its proposed changes to U.S. corporate tax policies, called the “Made in America” tax plan. It includes a proposal to establish a “Global Minimum Tax” rate on businesses, potentially bringing the U.S. fully on board with an effort that has so far been led primarily by international organizations of wealthy countries, including the G-20 and the Organization for Economic Cooperation and Development (OECD).
According to the OECD, countries around the world lose out on an estimated $100 billion per year in tax revenue through these “base erosion and profit shifting” maneuvers that have a negative impact on the very competitiveness tax-writing authorities are trying to protect.
These plans would set a global minimum corporation tax rate to 15%. They would also force giant multinationals to pay tax in the countries where they sell their goods and services, instead of in the lower-tax jurisdictions to which they have routinely shifted their profits. The Biden administration claims that its measures would end a race to the bottom in which nations have lured big businesses to their shores by undercutting other countries’ corporation tax rates.
The 2017 Tax Cuts and Jobs Act (TCJA), which was largely favorable to corporations, including multinationals, had some provisions to try to get at some international profits. It implemented the global intangible low-taxed income rate, or GILTI, of 10.5%, which was supposed to act as a minimum tax for offshore profits. And it tried to curb the practice of U.S. companies paying high interest and royalties to foreign affiliates to try to lower their U.S. tax bills. Under the Biden administration, the White House has laid out plans to overhaul parts of the tax code put in place in 2017, including the GILTI regime. Among other items, it would calculate the tax rate on a per-country basis, so companies couldn’t try to average out their German tax bill with their Swiss one, and it would increase the minimum tax rate to 21%.
Evidence following the 2017 corporate rate cut from 35% to 21%, however, did not show an increase in investment or economic growth from trend levels, with one analysis concluding that “there is no evidence that the 2017 tax law has made a substantial contribution to investment or longer-term economic growth.” In fact, a report from the International Monetary Fund (IMF) found that less than one-fifth of the increase in corporate cash balances, which were enhanced by the corporate tax cut, was used for capital and research and development (R&D) spending. Instead, the increased corporate cash balances were directed toward financing buybacks and dividend payouts for shareholders.
Over the past decades, a number of countries have enacted tax policies specifically aimed at attracting multinational business investment by lowering corporate tax rates. This, in turn, has pushed other countries to lower their rates as well, as a means of remaining competitive. Responding to the incentives created by these laws, many multinational corporations have moved their assets, particularly their ownership of intellectual property, to countries offering them low- or even no-tax treatment of the income those assets produce.
What is a global minimum tax?
A global minimum tax establishes a system under which a company from a specific country will pay at least a certain percentage of its profits in taxes, regardless of where in the world those profits are being earned. Basically, it would put a minimum tax rate on profits no matter where they’re coming from.
In a country that imposes a global minimum tax rate, a domestic company that moves some of its operations to a low-tax jurisdiction overseas would have to pay its home country’s government the difference between that minimum rate and whatever the firm paid on its overseas earnings.
For example, if a country with a global minimum rate of 25% is home to a company that earned profits overseas that were taxed at 15%, it would be entitled to bring the company into compliance with the minimum tax by charging it an additional 10%.
The Made In America Tax Plan
The current corporate income tax regime contains incentives for corporations to shift their production and profits overseas. Declining corporate tax revenues hinder the U.S. in funding investments in infrastructure, research, technology, and green energy.
The Made in America tax plan implements a series of corporate tax reforms to address profit shifting and offshoring incentives and to level the playing field between domestic and foreign corporations. These include:
- Raising the corporate income tax rate to 28%;
- strengthening the global minimum tax for U.S. multinational corporations;
- reducing incentives for foreign jurisdictions to maintain ultra-low corporate tax rates by encouraging global adoption of robust minimum taxes;
- enacting a 15% minimum tax on book income of large companies that report high profits, but have little taxable income;
- replacing flawed incentives that reward excess profits from intangible assets with more generous incentives for new research and development;
- replacing fossil fuel subsidies with incentives for clean energy production; and
- ramping up enforcement to address corporate tax avoidance.
These are the major elements of the Made in America tax plan, but the proposal contains several additional tax incentives that would directly benefit U.S. corporations, pass-through entities, and small businesses. These include, for example, a marked increase in the resources available through the low-income housing tax credit and other housing incentives.
The current premise—tax reforms
More than a decade has passed without any progress in bringing the global tax system into the modern age. But less than three months after taking office, President Joe Biden has raised hopes of a breakthrough, with proposals that could kill tax havens and force multinationals to pay a fairer share of tax.
Under proposals submitted to tax negotiators from 135 countries at the OECD, the Biden plan would force big companies to pay taxes where their revenues are earned, not where the profits can be shifted to. It would also establish a global minimum tax rate, agreed by the world’s biggest economies.
The free-market economists would have argued for the advantages of globalization: cheaper products, more choice. But profit-shifting by big companies—turbocharged in the digital age, with its unparalleled ease of doing business across borders—has left government coffers increasingly short. According to the Tax Justice Network, the sums lost to exchequers around the world have risen as high as $436 billion annually.
This comes at a time when Covid is driving up national debts to eye-watering levels. Public anger at tax avoidance, and demands on companies to pay a fair share, have also risen since the 2008 financial crisis.
In a race to the bottom designed to attract big companies to competing jurisdictions, the average statutory corporate tax rate across 109 countries assessed by the OECD dropped from 28% at the turn of the millennium to 20.6% in 2020. For Biden, ending the race to the bottom would help his administration raise domestic corporate taxes from 21% to 28% without big companies threatening to move and locate profits elsewhere.
Much negotiation still remains to be done, not least on the rate at which a global minimum tax would be set. Washington wants 15% but several nations have much lower rates. An agreement among EU nations would not be easy, as rates range from 9% in Hungary and 12.5% in Ireland to 33% in France.
There are concerns that if the U.S. continues to tighten rules and other countries don’t go along, it will be out on a limb. The concern is that if the U.S. has a minimum tax and no one else in the world has a minimum tax, there’s a disadvantage of being a U.S. company versus being a company headquartered in another country.
Biden administration’s plan appears to be trying to bring other countries along in its attempt at further corporate tax clampdowns, and sharpening its appeal. As per U.S. Treasury Secretary Janet Yellen, competitiveness is about more than how U.S.-headquartered companies fare against other companies in global merger and acquisition bids. It is about making sure that governments have stable tax systems that raise sufficient revenue to invest in essential public goods and respond to crises, and that all citizens fairly share the burden of financing government.
This column doesn’t necessarily reflect the opinion of The Bureau of National Affairs Inc. or its owners.
Abishek Goel is the founding partner of Finex Advisors.
Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.