On Monday, Treasury Secretary Janet Yellen called for a global minimum tax rate for multinational corporations. Yellen criticized the “race to the bottom” approach to corporate taxation that has been adopted for decades as statutory tax rates have continuously fallen for forty years from an average rate of 40% in 1980 to the current average of 24%. Also, she emphasized the operation of companies within a global economy where the fortunes of countries around the world are intertwined. When considering a taxation strategy, countries have to prioritize revenue collection, protecting domestic industries, attracting foreign investment, and tax efficiency. But with the globalization of corporations and the increase in companies built around intangible capital, taxation has become increasingly difficult. It is estimated that governments miss out on between $200 and $600 billion in revenues each year due to tax havens and the use of tax loopholes.
The Organization for Economic Cooperation and Development (OECD) has been working for years on developing a global minimum tax and now over 135 countries are supportive of the concept. From these discussions several debates emerged, such as whether companies should be taxed based on where their headquarters are located or where the income is earned and how digital companies should be taxed. To try to resolve these questions the OECD has proposed a framework for a global minimum tax where businesses are taxed based on the location of their customers rather than the location of their headquarters. This structure would lead to more taxation of U.S. tech companies in Europe and other countries (but less taxation in the U.S.) while the U.S. would be able to raise more taxes from European and other companies selling to American consumers. Additionally, Yellen told her counterparts at a G20 meeting in February that the U.S. would no longer demand a safe harbor rule that would allow U.S. tech companies to opt out of paying this tax overseas, dropping a major point of the Trump-era negotiations that served as a roadblock to an agreement.
In her speech, Yellen highlighted the need for governments to have tax systems that enable them to raise revenue for investment in public goods and crisis response measures. This sentiment reflects how Yellen’s advocacy for a global minimum corporate tax rate is tied to the Biden administration’s push for the $2.3 trillion infrastructure proposal. President Biden has proposed to pay for the eight years of infrastructure spending with higher corporate taxes. While the 2017 tax overhaul cut the corporate rate from 35% to 21%, Biden plans to raise the rate to 28% and impose a 21% tax on U.S. companies’ foreign profits, which is designed to limit the benefits from loading profits into low-tax countries. While supporters say the tax increase must be viewed with respect to how much domestic companies and the American people stand to gain from the infrastructure proposal, critics urge caution under the belief that a higher tax rate will hurt U.S. companies’ ability to compete with foreign companies facing lower rates of taxation. This criticism underscores the importance of a global minimum tax rate as a way to shrink the potential tax advantage of foreign companies by requiring other countries to increase their corporate tax rates.
A higher domestic corporate tax rate obviously cuts into the profits of businesses, but analysts see the increase in taxes as costing some companies more than others. Those with a high proportion of domestic earnings are more directly impacted by the rate increase while multinational corporations will feel the effects of the minimum tax on foreign income. The primarily domestic companies that are most likely to endure some losses are essentially the same companies that benefitted most from the 2017 corporate tax rate cut, including utilities, regional banks, and retailers. There is concern that a tax increase would cut into corporate profits just as the economy is starting to recover from the pandemic. For instance, retailers are heavily reliant on domestic income and have experienced lots of struggles with the rise of e-commerce and the pandemic’s limits on in-person shopping. However, companies hit hardest by the pandemic will not feel any immediate changes from the tax increase because businesses pay taxes only when they have profits. Also, struggling companies would be able to carry those losses forward to offset future taxes.
As an alternative to the Biden tax proposal, Senators Wyden, Brown, and Warner have drafted a framework that is more friendly to companies but still leaves many details to be ironed out. The focus of that proposal is how U.S. companies should be taxed on foreign income and how foreign companies should be taxed on U.S. income, but issues such as the actual rates are still up for discussion. Republican lawmakers have indicated that they do not support a corporate rate increase (despite their concern about the national debt) and pushback from more moderate Democrats, like Senator Joe Manchin, reflect a 25% rate as more realistic than the 28% the Biden administration favors. But what needs to be remembered in the coming discussion over rates is that prior to 2017 the corporate rate was 35%, providing proof that corporations can exist – and even thrive – in a world with a much higher corporate rate.
Finance ministers during a G20 meeting this past week said that they hope to agree on a global minimum tax by the middle of this year. And with Yellen’s concerted efforts to re-establish America as a global leader engaged in shaping the world’s economy that ambitious goal might be reached.