This plan is a real breakthrough in international taxation, but it still does not prevent tax optimization.
Recently, a lot has happened in the area of international tax synchronization. Joe Biden’s announcement in early April in support of a change in corporate taxation in the United States – the “Made in America Tax Plan” – has already put an end to decades of low income taxes. Companies. In early June, the agreement reached by the G7 laid the foundation for the international framework for the taxation of multinational corporations.
Since the early 1980s, tax competition between states has increased as a result of the regulatory cycle. The global average corporate tax rate fell from 40% in 1980 to 24% in 2019. Therefore, the OECD estimates a deficit of $ 100 to $ 240 billion per year for OECD member states. Globally between $ 500 billion and $ 600 billion per year. But states facing the erosion of their respective tax bases have gradually strengthened their mechanisms to combat tax optimization over the past two decades.
Tax rate at least 15%
In early April, at the G20 summit, US Treasury Secretary Janet Yellen announced that work was underway to set a minimum corporate tax rate. At the end of the same month, the Biden administration again showed its resolution by proposing to accept a minimum of 15% for OECD member states, with the explicit intention of raising it to 21%. Finally, in early June, the finance ministers of the G7 countries announced an agreement on a global minimum tax rate. Despite some negative reactions here and there, the agreement reflects a real breakthrough in international integration into corporate taxation, and may be a starting point on the path to global reform. There are two main axes to this agreement.
This agreement is a real step in terms of international tax synchronization, but it does not preclude tax optimization.
The first establishes tax jurisdictions for multinational corporations based on the country where the profits were made, not the country where the profits were declared. This is a very effective measure for the taxation of multinational companies in the digital sector. More generally, this will reduce the incentive to shift profits to lower tax countries.
The second axis gives jurisdictions the right to “tax refund” when other jurisdictions overseas use a lower level of income taxation. The move would actually create a global minimum corporate tax rate for multinationals, which would exclude multiple tax havens.
The devil in the details
This agreement is a real step in terms of international tax synchronization, but it does not preclude tax optimization. The first limitation of this agreement is that it only applies to companies with a profit margin of more than 10%, and only 20% of the profits made above this threshold. This means that a company like Amazon, to take the highest example, will not be affected. U.S. Treasury Secretary Janet Yellen has denied the allegations. It remains to be seen, however, how the courts will guarantee this action.
The details of the contract will be decisive. Significantly, the final agreement is called the “section” approach, which means that the jurisdictions can calculate taxes based on the income of the companies, not just at the corporate level. This approach is most appropriate for companies such as Amazon, where a segment is more profitable, while the overall company’s profit margin is below the 10% limit. Such “details” would be crucial.
The pace against tax reform can be expected to continue in the United States.
G7 members need to persuade other countries – especially China – to join the deal. The US Congress must pass this agreement. At the EU level, in the first half of 2022, it may be announced under the French Council.
Infection as a trigger
The severe economic impact of anti-Govt measures has forced governments to keep expensive stimulus packages, even if the financial room for their maneuvers – for the most part – is limited. Against this background, the Beden management has made clear its intention to exploit these additional budgetary resources – up to $ 2 trillion – through a corporate tax increase.
In the medium term, the Covid 19 is expected to continue beyond the crisis, and the dynamic United States against tax optimization, as in most OECD countries, given the critical US political environment in relation to the rise in inequalities. These structural changes are likely to continue to have an impact on the financial markets in the coming years and could mean a gradual resumption of government control over multinational corporations.