It’s time to enact the Global Minimum Corporate Tax

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In October 2021, political leaders from 137 countries agreed to a minimum tax rate of 15% on the profits of large multinationals, through the OECD. Since then, the momentum has waned.

There are legitimate technical questions about how the 15% minimum would work in practice. The proposed global minimum tax would limit the artificial shifting of profits by multinationals from high tax jurisdictions to low tax jurisdictions by eliminating tax havens entirely. But the 15% rate is not high enough to end profit shifting, as it is significantly lower than the average rate for OECD companies.

Another concern is the fact that refundable credits are exempt from the calculation of the minimum effective tax rate. This means that a country can convert any tax credit into cash grants and thus allow multinationals to operate there tax-free.

These aspects of the global minimum tax are the kind of political compromises that were needed to get 137 countries on board. Even so, if the overall outcome of the project is to force multinational corporations to pay taxes, regardless of their accounting tricks, the effort is worth it and the loopholes can be closed over time.

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However, there is a deeper critique of the global minimum tax, which is that the corporate tax itself is unnecessary. If the purpose of corporation tax is to indirectly tax the wealthy, this purpose can be more easily achieved by subjecting shareholders to personal taxation based on the value of their shares. That’s the proposal put forward by Sen. Ron Wyden (D-OR), chairman of the Senate Finance Committee.

If passed, all corporation tax could be repealed. And if the corporation tax is repealed, then the global minimum tax with all its complexity is superfluous.

But even if we can offset income in other ways, we still need corporation tax as an important regulatory device. Listed companies subject to corporation tax are key players in the economy. Among OECD economies, business activity – the value added by enterprises of any size or formality, including corporations, partnerships and sole proprietorships – accounts for 72% of GDP. In the United States, large corporations (subject to corporation tax) account for about 25% of GDP.

Governments can regulate companies directly. But given the limits of the information available to the government, it is often preferable to use indirect means of regulation, such as taxation. For example, if the government wants to incentivize companies to increase investment or hire more people, giving them tax incentives to do so (and letting them decide the precise amount of increased investment or payroll) is more effective than telling them how much to invest or to hire.

But for these incentives to be effective, they must be offered in the context of a robust corporate tax. There is no point in granting corporations the right to currently deduct equipment purchases (as currently permitted under current law) or granting them investment or payroll tax credits if the tax rate companies is zero.

The proposed global minimum tax would limit the artificial shifting of profits by multinationals from high tax jurisdictions to low tax jurisdictions by eliminating tax havens entirely.

And that brings us back to the overall minimum tax. Before 2017, the effective tax rate of American multinationals on their offshore income was close to zero. As a result, the effectiveness of many domestic tax expenditures (such as the pre-2017 deduction for domestic manufacturing) was minimal as multinationals benefited more from shifting profits offshore.

The enactment of the Global Low-Tax Intangible Income Minimum Tax (GILTI) at 10.5% in 2017 changed this calculation. Since offshore income was now subject to a tax of 10.5% (or 13.125% after foreign tax credits), the government could effectively offer a domestic tax incentive like the provision on intangible income derived from (FDII), which reduces the tax rate on exports from 21% to 13.125% and is intended to be a mirror image of GILTI. In the absence of GILTI, FDII would not work, as multinationals would prefer to transfer income from export operations overseas, where they would (without GILTI) be subject to zero taxation.

Thus, the global minimum tax is not only intended to curb profit shifting or tax competition. This is to preserve the integrality of corporate taxation and its ability to regulate corporate behavior by ensuring that no corporate income (domestic or foreign) is subject to zero taxation. The current corporate tax raised $370 billion in fiscal year 2021. According to the Joint Committee on Taxation, the global minimum tax would raise an additional $200 billion over a decade, or an additional $20 billion per year. year.

Of course, it would be better to set the overall minimum tax rate at the OECD average (23%, or 25% if weighted by GDP) rather than 15%. A higher rate would mean domestic tax incentives are even more effective, because at 15% it may still be better to shift profits offshore if the domestic tax incentive only reduces domestic income tax from (for example) 21% to 16%. But 15% is what could be reached politically, and it is much better than the pre-2017 rate on offshore income, which was close to zero.

Finally, since the US already has the GILTI Minimum Tax, why do they need the Global Tax Agreement? If GILTI were a real minimum tax, then it might not be, although it would still be good to eliminate the fallacious Republican argument that taxing foreign income hurts the competitiveness of American multinationals. , since the global agreement guarantees that all multinationals are subject to the same 15% rate on foreign income. (This argument is fallacious because U.S. multinationals do just fine under GILTI, even though multinationals from other countries are currently not subject to any minimum tax.)

But the current GILTI tax is fatally flawed. First, the rate is too low — at half the national rate, there are still too many incentives to shift income offshore, limiting the effectiveness of any domestic tax incentives. Second, because GILTI allows for averaging across countries, any U.S. multinational that is already invested in a country with a rate above 10.5% (which is most major countries in the world) has an incentive to invest in a zero-tax country to bring its average foreign tax rate to 10.5% and thus avoid paying any GILTI tax. Third, since GILTI does not apply to a deemed 10% return on tangible assets, it creates an incentive to move real investment and jobs offshore.

For all these reasons, the GILTI is not an effective minimum tax. That’s why the U.S. Congress must accept the global tax deal the Biden administration committed to last October and enact legislation that raises the GILTI rate to 15%, eliminates the average, and limits the incentive to transfer profits to zero-tax jurisdictions overseas.

This is precisely what the Biden administration proposed and passed in the House. All Senate Democrats (even Senator Manchin) are on board. The legislation should be passed as soon as possible, before a possible Republican takeover of the House makes its enactment impossible.

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