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Is Biden's World Company Tax a Revolution – or a Retreat?

June 8, 2021, 3:38 p.m.

As soon as US President Joe Biden had convinced his G-7 partners last week to support a historic global minimum corporate tax, critics began to criticize it – and not just the most predictable objectors such as some multinational corporations and their preferred tax havens. like Ireland. Biden also allows himself to be distracted by left-wing activist groups and the progressive wing of his Democratic Party who believe he is asking too little of the world's plutocrats.

One of the key questions is whether Biden and other world leaders are acting too faintheartedly by demanding a minimum global corporate tax of at least 15 percent. "It is absurd for the G7 to claim they are "overtaking" a broken global tax system by introducing a global minimum corporate tax rate similar to the soft rates imposed by tax havens like Ireland, Switzerland and Singapore, "said Gabriela Bucher, the executive director of the global anti-poverty organization Oxfam, in a statement. "You set the bar so low that companies can easily exceed it."

The bar isn't all that low. First, the effective tax rates currently levied by tax havens like Ireland are well below that minimum of 15 percent: Ireland's nominal tax rate is 12.5 percent, for example, but due to various interruptions it grants companies, the actual tax rate is for many under 1 percent companies, especially big tech companies like Apple. The same goes for other notorious tax havens like the Cayman Islands and Switzerland.

Second, and perhaps more importantly, the change proposed by Biden would not just set a new corporate tax rate – it would revolutionize the international financial system by taxing profits from goods and services for the first time in non-corporate jurisdictions. Traditionally, multinational corporations only paid such taxes in places where they were physically located, such as tax havens. If Biden's proposal becomes policy, it means that countries big and small – rich and poor – that in the past never made a tiny fraction of the profits of a multinational company, can now. This has never been done before.

"If tax havens like Ireland, Switzerland and Singapore don't think this is a big deal, why are they trying so hard to stop it?" Said a senior financial expert who is directly involved in the G7 talks and in confidential negotiations asked for anonymity. Moreover, if even a minimum of 15 percent is set, he said, "Will the big multinationals continue to do all the tax planning to tax them offshore?" Such financial maneuvers are expensive, and the new plan "removes many incentives to use tax havens," he claimed.

Perhaps the more sensible objection to Biden's proposal – which builds mainly on an earlier OECD plan – is that by setting 15 percent as the minimum standard, the major economies are giving too much away from the start. Biden had originally asked for a rate of 21 percent, but in order to gain followers, he agreed to lower that demand to "at least 15 percent". A senior administration official, who also requested anonymity to discuss confidential negotiations, said Biden intended to reverse the current system of "overuse of work and insufficient contributions from companies". In an interview last week, the official cited data showing that the proportion of U.S. federal revenue derived from taxation of labor rose from 50 percent in 1950 to over 80 percent today, while that of corporations rose from 30 percent today Percent in 1950 has fallen to less than 10 percent currently. The Biden government also hopes that by raising the domestic corporate tax rate from 21 percent to 28 percent, it can harvest more than $ 3 trillion to pay for its expensive payments Job and infrastructure proposals.

In a statement, US Treasury Secretary Janet Yellen – a longtime labor advocate – said Biden's global minimum tax "would end the race to the bottom in corporate taxation and ensure fairness for the middle class and working population in the US." and around the world. ”But as French Finance Minister Bruno Le Maire said this week, the 15 percent proposal is only“ a starting point. And in the coming months we will fight to ensure that this global minimum corporate tax is as high as possible. "

Nobel laureate in economics, Joseph Stiglitz, a progressive and longtime friend of Yellen, agrees that the current proposal will “begin to stop the race to the bottom”. But he said in an interview that the proposal for a global minimum tax known as "Pillar 1 ”of the agreement was“ severely flawed – too strongly influenced by the multinational corporations ”. Stiglitz said that Without a higher starting rate – for example a minimum tax of 21 percent – there is a risk that “the minimum tax will de facto become the maximum tax”.

“We underestimated our economic strength,” he said. “If Germany, France and the USA agree, they will have enough economic power under them to push the issue forward. Which company will say: 'I will not produce or sell in these countries?' "

Economists who support the proposal argue that even at 15 percent, multinational corporations may have no choice but to go along. Proponents of the plan also argue that such a level could be enough to get large global corporations to stop moving their headquarters to tax havens. In other words, if the global minimum is just high enough but not too high, the multinationals might calculate that it is better to pay the required taxes and stay on the New York Stock Exchange rather than flee to tax havens abroad.

"If the minimum tax treaty is actually implemented, we will see a paradigm shift in international taxation," said Daniel Reck, an economist at the London School of Economics, in an email. “It won't solve all problems; There will always be disagreement about which country should have the right to tax which part of corporate profits. But it should end the era of zero effective tax rates on large parts of corporate global profits. "

Especially some of the big tech companies like Facebook have already recognized the handwriting on the wall. In statements made over the past few days, the digital giants have hinted that they may prefer the current proposal to taxes on digital services that are being charged around the world, particularly by the European Union. Biden's plan would replace such arbitrary taxes.

"We strongly support the work to update international tax regulations," said Google spokesman José Castañeda in a statement. “We hope that countries will continue to work together to ensure that a balanced and lasting deal is reached soon.” In a tweet, Facebook spokesman and former UK MP Nick Clegg said: “We want the international tax reform process to be successful, and recognize that this could mean Facebook could pay more taxes in other places. "

Why is Silicon Valley seemingly so happy to play? Perhaps because the current Biden proposal is only aimed at profits, not total revenue, which digital taxes are currently seeking, and the tech giants know they may do better in the end. The tech industry prefers to levy levies such as the French 3 percent tax on online sales such as targeted advertising and the sale of data through a stable and agreed tax on so-called "residual" or additional profits (amounts over 10 to 20 percent .) to replace declared profits), on which the digital giants have not yet paid any taxes.

Critics like Stiglitz say that the current proposal is also closed "modest by targeting only those excess profits and not 100 percent of the multinationals global profits.

However, a further increase in the corporate minimum tax rate is unlikely to be politically feasible. Biden and other leaders who have tried to curb tax evasion by large corporations face a major challenge in getting a new tax approved. China, for example, the world's second largest economy and an influential member of the G-20, built its wealth on decades of generous tax incentives; it will need assurances that it can continue this policy. Even reaching an agreement between European countries will be a challenge, as corporate tax rates vary widely across the 27-country block. The G-20 will consider the proposal later this summer at a meeting of finance ministers.

For now, there is a long way to go to compromise, and Biden is playing the odds by starting negotiations at 15 percent. If the proposal has to be approved as a contract by the U.S. Senate, it could run into trouble: contracts require two-thirds of approval, and the Democrats only have half the upper chamber. (Some experts believe Biden could get around this by introducing the new tax as a regulatory adjustment from the Treasury.) Additionally, European nations like France, which have already imposed a digital services tax on big tech, could be hampered by their own parliaments. who may oppose the lifting of these taxes.

Another big question that lies ahead is whether the global corporate tax, when finally approved later this year at the G-20 summit, will even be enforceable in the more corrupt economies. Some governments may not have the will to raise money from their corporate overlords: Brazilian construction giant Grupo Odebrecht has been embroiled in recent government corruption scandals over the past decade that have targeted the country's former president, Luiz Inácio Lula da Silva, and other prominent Brazilians politicians led astray.

“There is tons of money all over Latin America and if the plan works, instead of accepting that a company like Odebrecht can hide that money in the Cayman Islands, Brazil can take 15 percent off Odebrecht. That will help Brazil, ”said the official involved in the negotiations, which are led by the OECD. “But the question is: will the Brazilian government have the juice?

“Some of these big companies influence politics in their country. What happens then?"

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