Plans for a Bigger Pie of Global Taxes, Sliced Fairly

(Bloomberg) -- Multinational companies have long used creative -- and legal -- ways to shrink their tax bills. One is to book profits from customers in places like Boston and Berlin as if they came from, say, Bermuda, which has no corporate income tax. Long-stalled efforts to revamp the global tax system are getting a new push, thanks to the pandemic and a policy U-turn from the U.S. The complex proposals boil down to two basic notions: setting a minimum corporate tax rate across the world (think of this as making a bigger revenue pie), and rewriting the rules for allocating that revenue among countries (cutting the pie up differently).

1. Why is this coming up now?

U.S. President Joe Biden is counting on increased corporate tax revenue to fund new spending on infrastructure and social programs. His plan includes raising taxes on U.S. companies and pushing for a 21% minimum levy for U.S. companies’ foreign income, which could pressure many countries to raise their current rate. Proposals from the U.S. have given fresh impetus to a years-long effort led by the Organization for Economic Cooperation and Development, a club of 37 mostly rich countries, to counter corporate strategies “that exploit gaps and mismatches in tax rules to avoid paying tax.”

2. Is this about more taxes or fairer taxes?

The two ideas have become linked. Internet companies in particular have long been the target of complaints that they don’t pay their fair share of taxes. The backlash gained momentum during the pandemic, as deep-pocketed technology giants benefited from a surge in online commerce while countries needed funds to pay for the health crisis. Century-old rules for allocating profits to different jurisdictions didn’t anticipate a globalized economy where data is the raw material. And some countries are also pushing for a global minimum tax to stop race-to-the-bottom competition among governments.

3. Could this actually happen?

That’s hard to say. Tax rules are already complex, and some of the proposals can seem fiendishly complicated. Yet global technology giants have mostly supported the OECD process, hoping to avoid a potentially chaotic mushrooming of unilateral measures around the world. What’s more, a new U.S. proposal opens the door to allocating more taxing rights to the countries where companies are making sales, instead of the ones where they’re based. The plan could mean, for example, the U.S. collects more income tax from foreign companies when U.S. consumers buy handbags made by France’s LVMH, or cars sold by Germany’s BMW AG. The OECD plan would also halt national measures from many countries aimed specifically at taxing tech giants -- which U.S. officials and lawmakers have argued were less about fairness and more about targeting American firms.

4. What would this mean for companies?

Those affected would see a major shift. The plan wouldn’t necessarily raise companies’ taxes, but it would likely change where some of their profits are taxed. That has many companies concerned that they’ll face new compliance challenges -- a worry the U.S. proposal tries to address --and that they could get caught in disputes between governments trying to assert their new, broader taxing rights.

5. What’s wrong with the current system?

The “legal and not-so-legal” use of tax havens costs governments $500 billion to $600 billion in lost corporate tax revenue each year, according to estimates cited by the International Monetary Fund. The Tax Justice Network, a U.K. advocacy group that says it wants a fairer tax system, names the British Virgin Islands, the Cayman Islands, Bermuda, the Netherlands and Switzerland (in that order) as the top five “jurisdictions most complicit in helping multinational corporations underpay corporate income tax.” U.S. Treasury Secretary Janet Yellen said the goal of the proposed global minimum rate is to end a “30-year race to the bottom on corporate tax rates.”

6. How would a global minimum tax work?

Here’s a scenario sketched out in a paper for the Atlantic Council by Jeff Goldstein, a former special assistant to the chairman of the White House Council of Economic Advisers: A company headquartered in Country A is reporting income in Country B, where the rate is 11%. With a global minimum rate of 15% in effect, Country A would “top up” the tax and collect another 4% of the company’s profit from Country B -- representing the difference between Country B’s rate and the global minimum rate. That undercuts any advantage of shifting to lower-tax places and pressuring countries to conform to the global norm.

7. Who benefits from the current system?

Many large corporations do. At least 55 large U.S. companies, including Nike Inc. and FedEx Corp., reported paying no U.S. federal income taxes in 2020 even though they were profitable, according to the Institute on Taxation and Economic Policy. And some nations benefit by attracting corporations with low rates. Ireland, with a corporate tax rate of 12.5% -- among the lowest across industrialized nations -- boasts the European headquarters of companies including Google, Facebook and Apple. Ireland won the most foreign investment projects in Europe on a per capita basis in 2019, according to advisory firm EY. Among the 27 members of the European Union, corporate tax rates range from 9% in Hungary to 31.5% in Portugal, according to the Tax Foundation.

8. Who is leading this effort?

The OECD is trying to broker an agreement among about 140 countries to write new rules addressing how digital firms are taxed and to create a minimum global levy. It supports the idea of requiring a multinational company to pay at least a minimum rate in every country where it pays tax. Biden’s proposed minimum rate of 21% for the U.S. is higher than proposals so far discussed at the OECD, which had honed in on 12.5%. Frustrated by a lack of progress at the OECD, some nations, such as France, have imposed so-called digital services taxes on local sales of companies such as Facebook, Amazon and Google -- grabbing a bigger share of the pie.

9. How do digital taxes work?

France led the way in introducing what’s known as a digital-services tax, imposing a 3% levy on revenue such as targeted advertising and the sale of data for companies with at least 750 million euros ($894 million) in global revenue and digital sales of 25 million euros in France. Of about 30 businesses affected, most are American, but the list also includes Chinese, German and British as well as French firms.

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