Biden’s plans to rewrite global tax rules introduced by Treasury Secretary Janet Yellen are the biggest shake up in world taxation for over 20 years – they are truly ambitious and if successful will be remarkable.
The plans are for a new global model for taxing multinationals based on sales in a given country, rather than profits, and the second is to make it impossible to benefit from the shift of profits to low tax jurisdictions by setting global minimum levels for corporate tax.
Currently most US multi nationals end up paying less than 8% corporate tax due to adroit tax planning by shifting profits to low-tax jurisdictions.
But will countries agree – after all each country treats its right to raise taxes and the manner in which it does it – its national or sovereign right? What is the tools Biden can use to get his plans accepted globally?
His timing was lucky, but impeccable; there has never been a better time to announce global tax changes designed to tax multi-national organizations a ‘proper’ rate of tax from which every country can benefit.
But how will it work – I do not have a crystal ball but …
International tax planning for multinationals varies from one business to another, but a common form of tax planning is to transfer the intellectual property (IP) such as the right to use the name ‘Starbucks’ a global brand, to a company resident in a low tax jurisdiction such as Ireland where the tax rate is 12.5%. The company in Ireland then charges the other companies in the group in high tax jurisdictions a fee for using this IP, thereby creating a tax- deductible expense in the high tax jurisdictions and shifting the profit to Ireland a low tax jurisdiction.
Biden’s proposal is that the taxation of multi-national businesses should not be taxed on profits but on sales in each country and will introduce a global minimum corporate tax rate which has been suggested as 21%.
I am guessing that the way it would operate would be similar to the way double tax treaties work – which is that the high tax jurisdiction would have primary taxing rights up to the minimum corporate tax rate with a deduction for taxation in the low tax jurisdiction. This will remove the incentive of multi-national organizations to transfer IP to countries such as Ireland and the Netherlands because there would be no incentive to do so. Of course, the devil is in the detail – what will be the minimum corporate tax rate and how flexible can a country be to introduce exemptions and reliefs which could again make it attractive to multi nationals
The response from Ireland’s Finance Minister Paschal Donohoe was to say, ‘Momentum has been building towards reaching a consensus on how to better tax multinational companies’, but he then goes on to say that other countries ‘must have regard for the long established Irish corporate tax rate of 12.5%’ which is ‘a fair rate’ and one that is ‘within the ambit of healthy tax competition’. Turkeys don’t vote for Christmas.
So how can Biden put pressure on countries which attract business into their country through favourable tax planning – it has been done before!
Biden’s proposal is aimed at the 130 + OECD countries
The OECD (Organization for Economic and Cultural Development) is an international organization which works to build better policies for better lives.
It’s goal is to shape policies that foster prosperity, equality, opportunity and well-being for all.
It works with governments, policy makers and citizens to build evidence based international standards and then sets about inspecting countries to see how well they comply with those standards.
In a report issued in 2000 the OECD identified a number of jurisdictions as tax havens against a series of objective criteria it had established. All these jurisdictions subsequently made commitments to comply and were ‘blacklisted’ until they did.
The US has also been successful in introducing global reporting and transparency. In 2010 it introduced the Foreign Account Compliance Act (FATCA) which required all non-US financial institutions to search their records for customers who were US citizens or who held a green card and who were chargeable to US taxation. Any financial institution with such a customer the was then obliged to report to the US Department of the Treasury, the name of the customer, amount in the account and any transactions. FATCA was designed to give the IRS the information they needed to catch US tax cheats.
The primary mechanism for enforcing non-US financial institutions to report was a punitive withholding on all US assets held by such institutions of up to 30%.
It was widely thought that such financial institutions would divest themselves of their US assets and US clients, but much to everyone’s surprise financial institutions across the globe invested in the compliance necessary to meet these obligations.
Forbes estimated that the cost of compliance was roughly US$ 8 billion a year, approximately ten times the amount estimated revenue raised for the IRS.
The US is still the largest economy in the world (just) and recent history would suggest that when it demands compliance the world would complies – we will soon find out whether this remains to be the case – but one thing is clear – this change could make a significant difference to the amount of tax collected by the world’s countries coffers at the expense of who..
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