U nited States President Joe Biden has declared his intention to go big on spending. After adding on a $1.9 trillion stimulus package to those that had been announced by the Donald Trump administration, he unveiled a huge $2 trillion infrastructure spending package, spread over eight years, to revive the U.S. economy and restore its competitiveness. There is likely to be another plan for investment of $1 trillion in childcare, healthcare and education.
To make clear that the plan is not mere rhetoric, the administration proposes that the total planned investment of $3 trillion or more will be financed with an increase in the corporate tax rate in the U.S. from 21 to 28 per cent, an effort to put in place a 21 per cent global minimum corporate tax, and yet-to-be-announced increases in income and capital gains taxes and estate duties imposed on the wealthy. In this way, Biden expects to unite the Democrats and take its more progressive sections with him as he embarks on the tough negotiations with Republicans to win support for the ambitious agenda.
The proposed increase in the domestic corporate rate is not as hefty as it looks. It only partially reverses the tax cuts adopted by Trump, leaving the rate well below the 35 per cent touched under Barack Obama. Moreover, the increase is to be phased out over a 15-year period, with spending in the interim funded by borrowing. Yet big business in the U.S. is prepared for battle, declaring the tax increase proposal “dangerously misguided”. However, there is widespread resentment that even in the worst of times, big business reaps large profits and manages to pay little or no taxes. With the requisite popular support, the proposals may well go through. Also read: American Rescue Plan all set to boost economy
Opponents of the corporate tax increase argue that it would weaken U.S. firms relative to competitors headquartered in jurisdictions with much lower tax rates and encourage them to shift to tax havens elsewhere. The infrastructure financing plan addresses that issue as well by backing a global minimum corporate tax rate which it wants set at 21 per cent. That amounts to doubling the minimum tax rate on foreign profits of U.S. companies from 10.5 per cent. If the rate in a location where a multinational initially books profit is lower than 21 per cent, the government of a country in which that multinational is headquartered can levy taxes to cover the difference.
Global minimum corporate tax
Not wasting any time, Treasury Secretary Janet Yellen has put out a call for other countries to support the proposal for a global minimum corporate tax rate. In a speech to the Chicago Council on Global Affairs, she reportedly said: “Together we can use a global minimum tax to make sure the global economy thrives based on a more level playing field in the taxation of multinational corporations, and spurs innovation, growth, and prosperity.” This is a shift in stance for the U.S., which in the past wanted the choice of which jurisdictions they should be taxed to be left to the multinationals.
With the U.S. behind it, the proposal for a global minimum tax on transnationals is likely to win broad support, even if not necessarily at the 21 per cent level. All the more so because of discussions that have been underway among 135 countries involved in the Organisation for Economic Co-operation and Development’s (OECD) Inclusive Process on Base Erosion and Profit Shifting on requiring companies to pay taxes in jurisdictions in which they operate, rather than shifting profits to tax havens and paying little or negligible taxes. Also read: Foreign policy changes Biden faces
A blueprint has been readied by the OECD Secretariat on how that can be done and the idea is to arrive at an agreement sometime this year. This would mean that all countries contributing to transnational revenues, and not just the one where the parent firm’s headquarters is located, would benefit and share in the taxes imposed on technology giants and other multinationals, many of which are from the U.S. The proposal for a “global” minimum corporate tax is seen as compromising and allowing for that possibility, so as to ensure that higher rates in its jurisdiction would not see a further exodus of U.S. companies to low-tax locations abroad.
If a global consensus is arrived at, the likes of Apple, Google, Amazon and Facebook, besides Starbucks, LMVH and Mercedes Benz, will be forced to hand over a part of their surpluses as corporate tax to governments in jurisdictions that they operate in and where they are headquartered. In the past, companies such as these moved profits to locations that were tax havens. According to one estimate, U.S. multinationals had raised the share of foreign profits that were shown as earned in tax havens from less than a tenth in the 1960s to more than 50 per cent in 2018. These included not just locations such as the Cayman Islands and British Virgin Islands, but also Ireland and the Netherlands, which saw some benefit in getting companies to route their profits through their jurisdictions in return for small revenues from lenient taxes. For example, to attract interested companies, Ireland brought down its corporate tax rate from 32 to 12.5 per cent over a five-year period ending 2003.
Shrinking tax base
A consequence of such competition is, of course, a race to the bottom, which, in a world where multinational firms increasingly account for an overwhelmingly large share of revenue and profits, means that governments are faced with a shrinking tax base. Combine that with a generalised bias for lower taxes, which is reflected, according to The Economist , in a fall in average global corporate tax rates from 40 per cent in 1980 to 24 per cent in 2020, and a strong streak of fiscal conservatism that reins in government fiscal deficits and public borrowing, and the result is a sharp fall in government expenditures. This has meant lower growth during the years of globalisation when these tendencies were manifest. But now, the U.S. administration under Biden sees curtailed spending as underlying the loss of U.S. competitiveness relative to the likes of rising rival China that has sustained extremely high investment rates for decades. The agenda is to sharply raise state spending, for which higher tax revenues and a global tax compact are prerequisites.
Digital services taxes
However, arriving at a global agreement is unlikely to be easy. This is reflected, for example, in the U.S. position on digital services taxes (DSTs). In late March 2021, with the Biden administration in place, the Offices of the U.S. Trade representative (USTR) issued a set of reports on Section 301 investigations into DSTs imposed by a set of trading partners (Austria, India, Italy, Spain, Turkey, and the United Kingdom) which found them eligible to be subject to trade actions because their DSTs “discriminated against U.S. digital companies, were inconsistent with principles of international taxation, and burdened U.S. companies”.
The USTR Katherine Tai, a Biden appointee, noted: “The United States remains committed to reaching an international consensus through the OECD process on international tax issues. However, until such a consensus is reached, we will maintain our options under the Section 301 process, including, if necessary, the imposition of tariffs.”
India’s digital services taxes make clear what is at issue here. In 2016, India introduced an equalisation levy of 6 per cent on payments for online advertisement services to non-resident agents. In 2020, the ambit of the levy was extended to include payments to non-resident e-commerce operators deriving revenues from provision of e-commerce services, such as digital platform services, digital content sales, and data-related services, and the rate fixed at 2 per cent.
The basic idea behind the levy is that since digital commerce allows non-resident entities to provide services to and earn revenues from Indian residents without having a physical presence in the country, they would not be recording revenues and profits here. This deprives the Indian government of tax revenues that it would otherwise derive from such activities, in lieu of which the DST was imposed. The OECD’s international taxation blueprint does recognise that countries in which customers who are serviced remotely by multinationals earning large revenues and profits are located, had a right to a share of the revenues garnered from the taxation of such profits. So, the blueprint provides for attributing a portion of those profits to such countries, which can benefit from the taxes levied on those profits. If the U.S. wants its proposal for a global minimum corporate tax to go through it would have to accept some version of this proposal. Also read: New regimes, old games
Given that, and the fact that the equalisation levy has been in place for some time, the better option for the USTR would have been to hold on accusing India, and the other trading partners levying DSTs, of violating the principles of international transaction. To declare, instead, that the U.S. would maintain its options under the Section 301 process and threaten imposition of tariffs is to send out contradictory signals regarding the willingness of the U.S. administration to cooperate in the task of framing a global taxation architecture largely to further its own ambitions of restoring U.S. economic competitiveness and dominance.
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