Could Biden’s global minimum corporate tax rate work?

The Biden administration’s pro­pos­als for a glob­al min­i­mum cor­po­rate tax rate are gath­er­ing momen­tum, with the Euro­pean Com­mis­sion and, more recent­ly, Cana­di­an finance min­is­ter Chrys­tia Free­land, voic­ing their sup­port for the reforms.

Out­lined in April by the US trea­sury sec­re­tary, Janet Yellen, the plans would set a glob­al min­i­mum cor­po­ra­tion tax rate of 21 per­cent. 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 UK’s top rate has dropped from 26 per­cent to 19 per­cent over the past decade, for instance. But get­ting these plans to work in prac­tice will not be straight­for­ward. 

A ‘turning point’ for corporate taxation?

A mas­sive upsurge in prof­it-shift­ing in recent years has high­light­ed the need for glob­al coor­di­na­tion in reform­ing the sys­tem. So says Alex Cob­ham, chief exec­u­tive of the Tax Jus­tice Net­work, an inde­pen­dent research and advo­ca­cy organ­i­sa­tion.  

Point­ing to research show­ing that US multi­na­tion­als went from shift­ing about 5 per­cent of their prof­its in 1990 to 30 per­cent by the 2010s, he says: “You’re talk­ing about tril­lions of dol­lars a year being shift­ed – a first-order glob­al eco­nom­ic prob­lem.” 

The 37 OECD nations have been dis­cussing how to over­haul the tax rules for multi­na­tion­als for more than a decade, but Biden’s inter­ven­tion should prove piv­otal, accord­ing to Cob­ham.  

“This is a mas­sive turn­ing point,” he says. “The nar­ra­tive shift from Yellen and Biden – and their com­mit­ment to end the race to the bot­tom on cor­po­rate tax­es – is dra­mat­ic. In 10 years’ time, we’ll look back on their pro­nounce­ments and see it as the moment things shift­ed.” 

But much remains in the bal­ance, as wide­spread coop­er­a­tion will be required. There has been a com­mit­ment to reach a deci­sion on the planned reforms by the 9 July meet­ing of the G20’s finance min­is­ters and cen­tral bank gov­er­nors. “There’s prob­a­bly one shot at some­one tabling a pro­pos­al that works, both polit­i­cal­ly and tech­ni­cal­ly,” Cob­ham says. 

The impact on Ireland 

Ire­land — an OECD mem­ber — has been one of the more vocal oppo­nents of Biden’s pro­pos­als. A 12.5 per­cent cor­po­rate tax rate has helped the coun­try to attract numer­ous multi­na­tion­al busi­ness­es, includ­ing Apple and Google. The Irish finance min­is­ter, Paschal Dono­hoe, recent­ly reit­er­at­ed his desire for “accept­able tax com­pe­ti­tion” among coun­tries to con­tin­ue. 

Ian Bor­man, a Lon­don-based part­ner at inter­na­tion­al law firm Win­ston & Strawn, sym­pa­this­es with Ireland’s cause. “There’s no moral imper­a­tive to hav­ing a high cor­po­rate tax rate. There are just alter­na­tive sys­tems,” he argues. “All coun­tries set their tax rates to achieve com­plex out­comes in the real world – these are not just dreamt up.” 

Irish oppo­si­tion to a glob­al tax floor may not be enough to pre­vent its imple­men­ta­tion. If the world’s largest economies — where the cor­po­rate giants make most of their prof­its — were to agree to the US pro­pos­als, it would remove the finan­cial incen­tive for a multi­na­tion­al busi­ness to move to Ire­land, as the com­pa­ny would have to pay tax in the coun­tries where its eco­nom­ic activ­i­ties actu­al­ly take place. 

Cob­ham believes that Ire­land “should just be left with the multi­na­tion­als that are there. There’s still a val­ue for them, as the coun­try offers mar­ket access, human cap­i­tal and infra­struc­ture – the real stuff, as it were. In which case, if you’re Ire­land, why wouldn’t you just put your rate up to 21 per­cent and take the tax rev­enue?” 

He adds: “What’s slight­ly wor­ry­ing is that the Irish gov­ern­ment appears to have done noth­ing to pre­pare for the new world that might be just around the cor­ner. If your entire busi­ness mod­el is about to go, you should prob­a­bly be doing some plan­ning.” 

Mar­cel Olbert is an assis­tant pro­fes­sor of account­ing at Lon­don Busi­ness School whose research focus­es on the effects of cor­po­rate tax­a­tion. He says that there may not be an imme­di­ate reac­tion from multi­na­tion­als in Ire­land should the Biden reforms be imple­ment­ed.  

“It’s impor­tant to remem­ber that tax­es aren’t every­thing,” he stress­es. “Dublin is a huge hub for tech com­pa­nies, so a rate change prob­a­bly wouldn’t cause a mass exo­dus. But it will affect cor­po­rate deci­sions in the future, because research has shown that busi­ness­es do react to fis­cal incen­tives.” 

The global consequences

Olbert believes that ter­ri­to­ries with the strongest eco­nom­ic activ­i­ty have the most to gain from the Biden reforms. “I think it’s log­i­cal to project that coun­tries with large con­sumer mar­kets in Europe, such as Ger­many, France and Italy, would ben­e­fit the most,” he says. “On a more glob­al scale, it would mean that a lot of tax rev­enue could be allo­cat­ed to India and Chi­na too.”  

Busi­ness lead­ers may even appre­ci­ate the imple­men­ta­tion of a high­er stan­dard rate of cor­po­ra­tion tax, argues Olbert, who explains: “Many dig­i­tal com­pa­nies are con­cerned about the intro­duc­tion of dig­i­tal ser­vices tax­es across Europe. Hav­ing dif­fer­ent reg­u­la­tions between coun­tries increas­es their com­pli­ance costs, so some multi­na­tion­als might actu­al­ly wel­come a coor­di­nat­ed approach. Investors also like cer­tain­ty, so glob­al coor­di­na­tion on tax pol­i­cy is prob­a­bly more valu­able than a slight­ly low­er rate to cor­po­rate deci­sion-mak­ers.” 

But James Mas­trac­chio, part­ner and co-leader of Win­ston & Strawn’s tax con­tro­ver­sy prac­tice in Wash­ing­ton DC, believes that it would be high­ly unlike­ly that the reforms, if imple­ment­ed, would pro­duce all the out­comes desired by their pro­po­nents.  

He says: “Even if we went to a flat tax, there are too many ten­ta­cles for that to be a sim­ple change. If gov­ern­ments want to incen­tivise cer­tain indus­tries, they can pro­vide tax breaks. For exam­ple, tech com­pa­nies get a favourable out­come when they invest in R&D. There are lots of com­pet­ing con­cerns, so some­thing that may look very sim­ple would, in fact, be enor­mous­ly com­pli­cat­ed.”