On October 8, 2021, 136 countries agreed to a global minimum tax rate of 15%. It is now up to Congress to approve the deal, but US lawmakers are divided.
Proponents suggest that the global minimum tax will end tax competition, where large corporations avoid paying higher taxes in their home country by shifting profits to a country with lower taxes. Treasury Secretary Janet Yellen called tax competition a “race to the bottom on corporate tax rates.”
For example, Ireland has been described as a “tax haven,” with a 12.5% corporate tax. This low rate has helped Ireland attract foreign investment from multinational companies, bringing an influx of jobs and revenue into the country. Facebook, Apple, and Google all have their European headquarters in Ireland.
The agreement, spearheaded by the Organization of Economic Development (OECD), consists of two pillars.
The first pillar outlines a minimum 15% tax rate that will apply to overseas profits of firms with $868 million in global sales. As Reuters explains: “Governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could “top up” their taxes to the 15% minimum, eliminating the advantage of shifting profits.” In other words, Ireland can keep its 12.5% corporate tax but the company’s home country can pick up the difference by imposing a tax of 2.5%. The OECD predicts that the 15% minimum tax rate will generate an additional $150 billion in global tax revenue every year.
The second pillar, according to the International Consortium of Investigative Journalists, allows governments to tax companies “in the countries where their goods or services are sold, regardless of whether or not the company has a physical presence there.”
Country leaders hope that these pillars will “level the playing field” and bring back jobs and revenue to the economies where the companies are headquartered.
However, some experts simply point out that tax avoidance among multinationals is an exaggerated worry. As Dan O’Brien, chief economist at the Institute of International and European Affairs, noted, “Corporation tax revenues have not been falling, they have been rising as a percentage of GDP and as a percentage of total tax.”
Furthermore, Google already announced a change earlier this year to limit its own tax avoidance. The company had engaged in a strategy known as “IP onshoring” where it held intellectual property such as patents and trademarks in subsidiaries based in Ireland but operated from elsewhere in order to exploit a tax loophole.
Other economists view tax competition as a beneficial tool that limits the government’s power to tax. Some argue that tax agreements assume that tax competition is harmful because it leads to lower taxes. However, Peter St. Onge, research fellow from The Heritage Foundation, calls tax competition a “race for the top for the people” because since every tax dollar comes from the people, lower taxes means people have more money “to build, invest, and create jobs in their communities.” Similarly, the Taxpayer Protection Alliance argues that “corporate taxes are regressive” because companies will pass on the higher cost to workers and consumers in the form of reduced compensation and higher prices.
After years of negotiation, countries around the world have agreed to increase taxes on multinational companies. Some applaud the deal as necessary cooperation while others call it a detrimental cartel. Countries like the US now have to get their own legislative bodies onboard amidst political disagreement before the planned implementation date of 2023.
Works cited:
https://www.reuters.com/article/global-tax-explainer-idCAKBN2GY1XX
https://www.icij.org/investigations/paradise-papers/136-countries-agree-to-global-minimum-tax-for-corporations-in-historic-oecd-deal/
https://www.reuters.com/business/finance/what-is-global-minimum-tax-what-will-it-mean-2021-06-05/
https://www.businessinsider.com/ireland-corporation-tax-facebook-google-apple-15-minimum-rate-2021-10
https://www.dw.com/en/bidens-revolutionary-corporate-tax-plan-raises-big-questions-for-ireland/a-57695167
https://www.npr.org/2021/10/08/1044417794/over-130-countries-clinch-a-deal-that-could-radically-reshape-how-companies-are-
https://www.heritage.org/taxes/report/the-biden-administration-signs-america-global-tax-cartel
https://www.latimes.com/business/story/2020-01-01/google-tax-loophole
https://www.protectingtaxpayers.org/press/taxpayer-watchdog-blasts-global-corporate-minimum-tax-proposal/
Photo credits:
https://www.reuters.com/business/finance/what-is-global-minimum-tax-what-will-it-mean-2021-06-05/
https://www.npr.org/2021/10/08/1044417794/over-130-countries-clinch-a-deal-that-could-radically-reshape-how-companies-are-
https://www.latimes.com/business/story/2020-01-01/google-tax-loophole
https://www.bloomberg.com/news/articles/2021-04-08/plans-for-a-bigger-pie-of-global-taxes-sliced-fairly-quicktake