The Need for a Global Corporate Tax Regime
by Joseph Joyce
The Need for a Global Corporate Tax Regime
When the Organization for Economic Cooperation and Development began its call for a reform of the rules of global taxes in order to clamp down on the avoidance of taxes by multinational corporations, its efforts looked quixotic. But the OECD persisted, and U.S. Treasury Secretary Janet Yellen is now participating in negotiations with the other OECD members to reform the (non-)system. While there is much left to negotiate, the broad framework of an agreement to establish a new regime, which governs where taxes are assessed and the determination of a global minimum tax, now exists.
A new volume edited by IMF economists Ruud A. de Mooij, Alexander D. Klemm and Victoria J. Perry, Corporate Income Taxes under Pressure : Why Reform Is Needed and How It Could Be Designed, presents the case for implementing a global approach. The first part of the volume describes the reasons for taxing corporate profits, explains the emergence of the rules governing how multinationals could be treated, and shows the complications that the growth in services and digital trade placed on an already fragile system. The second section examines the workings of the current system, including the difference between source-based and residence-based taxes, the use of bilateral tax treaties to allocate taxing rights, and the ability of corporations to use the differences amongst tax regimes to lower their liabilities by shifting the source of their profits to low-tax jurisdictions. The third section analyzes the relative merits of various reform proposals.
The magnitude of lost tax revenues can only be estimated, since multinationals are not required to report all the data on their operations. But economists have used the available data in inventive ways to estimate the losses. Kimberly Clausing of Reed College explains the data limitations and the attempts to provide reasonable estimates with the data that are available in a recent paper, “How Big is Profit Shifting?”. Most of the profit shifting undertaken by U.S.-based multinationals occurs with a few tax havens: Bermuda, Cayman Islands, Ireland, Luxembourg, Netherlands. Singapore, and Switzerland. Clausing calculates that U.S. tax revenue losses from such activities may gave reached $100 billion in 2017, about a third of federal corporate tax revenues.
The OECD has made available a great deal of documentation on the challenges of profit shifting and the proposals to arrest these activities. Many of these analyses are summarized in Addressing the Tax Challenges from the Digitalisation of the Economy: Highlights. The first part of the document explains the proposals under negotiation, known as Pillar One and Pillar Two. Pillar One expands the right to tax a firm beyond its physical presence in a jurisdiction to include “…a significant and sustained participation of a business in the economy of the jurisdiction, either physically or remotely.” Pillar Two ensures a minimum level of tax on the profits of multinationals.
The OECD estimates that if both proposals were implemented, there would be revenue gains for low, middle and high income jurisdictions. The impact of “investment hubs” is more ambiguous, but they would lose some of their tax base. But could these changes adversely affect business activity? The OECD acknowledges that investment costs would rise, but estimates that the impact on investment would be minor.
Tibor Hanappi amd Ana Cinta González Cabral of the OECD Centre for Tax Policy and Administration present a detailed examination of the effect on investment costs in their paper, “The Impact of the Pillar One and Pillar Two Proposals on MNE’s Investment Costs: An Analysis Using Forward-Looking Effective Tax Rates.” They estimate that the rise in the effective average tax rates (EATR) of multinationals in their sample of 70 jurisdictions would be 0.4 of a percentage point, which is small compared to the existing weighted average 24% EATR. Moreover, the reduction in tax differentials would make other factors, such as education and infrastructure in host countries, more important in determining the location and scale of investments.
An agreement on multinational taxes would benefit the Biden administration, which needs revenue to pay for its ambitious infrastructure plans. The administration could use the implementation of a global tax to counter claims that an increase in the U.S. corporate income tax rate, which fell from 35% to 21% in the Trump administration, would make U.S. firms uncompetitive. A coordinated system of taxes would also be a response to the challenge to the ability of governments to tax businesses that profit shifting has posed. Only a global system would stop the “race to the bottom” of national corporate taxes that has resulted in the current tax regime.
I agree that it is both a race to the bottom–with countries trying to obtain comparative advantage not through lower labor and other costs or through natural resource or other advantages, but rather through lower taxes–and tax havens where corporations artificially park their profits. While I have railed about this for years, I have come to the conclusion that it is really a game played by the wealthy to take the eye off of them. The real problem is taxing artificial entities in the first place and then at least in the United States giving tax breaks to individuals receiving dividends, capital gains and inherited stock. You can certainly get folks moving to tax havens to avoid taxes, but most of the owners of publicly traded multi nationals are not going to move to the Bahamas if they have to pay full freight on their dividend or capital gain income. The idea that we are going to jump through hoops to capture some portion of $100 billion when there is probably several times that lost because of the reduced taxation of dividends, capital gains and stepped up basis at death, seems counterproductive. Indeed, if we really were serious about wanting to tax at the entity level, I am sure we lose more with sub chapter S and LLCs than through multinational gameplaying. Add to that morons like Ron Johnson who reduced individual tax rates on pass through entities to “level the playing field” because of the corporate tax cuts, and you understand that regardless of party we are all being taken to the cleaners by the uber wealthy. Remember if you think you pay too much in taxes it is not because the government spends too much, it is because the wealthy do not pay enough.
Robert Goulet – Impossible Dream – YouTube
Janet says the same, and the answer is good luck.
“…quixotic…” – definition –
The Impossible Dream (The Quest) – YouTube
Let’s start with the inherent injustice of extraterritoriality: an alliance of rich nations (OECD) seeking to force non-members (I’m thinking Singapore, Hong Kong, and other small, open economies) to adhere to their rules. No benefits are offered for compliance, only threats that “it would be a real shame if something bad were to happen to that nice economy you got there.”
Next, we have the notion that there are “lost revenues,” because the rich club didn’t collect taxes that they thought they were owed. Did they prosecute? Did they alter their own laws to make it more difficult to avoid taxation? Or, did they take the bully’s way out and simply demand that weaker economies do their homework for them? Unrepresented players in the game would like to know.
Third, do we need to point out that the rich tend to have large budget deficits, and their targets don’t? Should we blame this on revenues or spending? Given that the target economies tend to have less to offer in terms of military power, social welfare, or other perks of the rich countries, perhaps the members of the OECD should try to live within their budgets for a change, rather than forcing the targets to bust theirs.
Finally, most of the economies that are being targeted had no say in establishing the rules of the game, either at Breton Woods or during the internal OECD discussions. Rather, they found loopholes and exploited them, just as business (and politicians) have been doing for years. They learned to play the game, well, and are now being rewarded with a change in the rules.
TANJ!