Will a minimum corporate tax really curb inversions?

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A global minimum tax seems to be upon us. In a historic announcement made earlier this month, the Organization for Economic Co-operation and Development (OECD) said 130 countries had concluded an agreement for an overall minimum tax of 15%.

Specifically designed to eliminate corporate tax inversions – i.e. companies moving their headquarters to a country with a lower corporate tax rate – the G-7 and OECD both have actively pursued this deal for years.

Some not-so-insignificant hurdles were removed in the process. For example, notable holdouts that already had low corporate rates, like Ireland, were initially reluctant to sign, but eventually agreed on a minimum rate. And with the new push from the Biden administration, the deal was finally able to cross the finish line, leading many to take a victory lap.

“[This] This agreement will make our international tax systems fairer and work better,” said Mathias Cormann, Secretary-General of the OECD. “We must now work quickly and diligently to ensure the effective implementation of this major reform.”

But as the organization celebrates a milestone, the cogs may already be in motion in the United States, which will undermine the primary purpose of this pact.

Like [the OECD] celebrates a milestone, the wheels may already be in motion in the United States, which will undermine the main purpose of this pact.

As it stands, the Biden administration the tax proposal is fluid. While the president campaigns to raise the corporate tax rate to 28%, he recently lamented that he did not have the support – even within his party – to do so. In September, Democrats began to coalesce behind a rate of 26.5% instead, a move that would have partially reversed President Donald Trump’s tax cuts, which lowered the tax rate to 21% from 35%. But at the end of October, the White House conceded that a corporate tax hike was unlikely to do so. signature social expenditure bill.

The issue is on the back burner for the time being, but it is one that the President is passionate about, which makes it likely to be revisited. But could it stick? Could a potential US corporate tax hike undo global progress and lead corporate finance departments to seek tax loopholes again?

This is a distinct possibility. The idea behind President Trump’s 21% flat tax was to approximate the rates of lower-taxed jurisdictions much closer. Although not as low as, say, Ireland’s 12% rate for companies with a turnover of less than $636 million, it was closer to the ballpark. As a result, he shifted the responsibility to American companies to bring valuable revenue back to national shores.

But even a compromised rate of around 26.5% may be too big a gap to bridge, especially compared to the new 15% in most countries like Ireland (which, as is the case above all regulatory change, charges 15% to companies that earn more than $636 million.) will levy. This 6% sinkhole could arguably be put down to the positive public relations a multinational would get from having its headquarters in the United States. A gap of 11.5%? It may not be so easy to ignore.

And if so, what hope does the United States have of preventing profits from being transferred to a jurisdiction at the minimum rate of 15%?

It should be noted that limiting tax inversions is not the only problem that the global minimum tax agreement seeks to address. The rules for digital taxation of intangible assets will be set. Tech giants like Amazon, Facebook and Apple will be required to pay taxes in the countries where they sell their goods or services, even if they are not physically present there. That in itself will be a boon to the tax coffers of most countries. But for countries with higher corporate tax rates, the deal’s central focus is on shaky ground.

A global minimum tax will undoubtedly eliminate the rate-cutting game we’ve seen so far, and to that extent it’s a win. But a skeptic might note that some countries would not have agreed to raise their rate to 15% if they had not thought they could still offer an attractive package to large multinationals.

If the Biden administration plans to revisit this issue, it must balance the risks with the potential reward. Will a higher corporate rate really bring in more tax revenue? Or will it simply push companies into the wait-and-see arms of countries that set their rate at 15% and not a penny more? Time will tell.

Brian Peccarelli is co-chief operating officer of Thomson Reuters.

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