A Grand Bargain in the Making?
Business taxation has recently made the news headlines following the announcement by US Treasury Secretary Janet Yellen of her support for a Global Minimum Corporation tax of 21%, coupled with a proposal to raise the US domestic corporation tax rate to 28%. The US has committed to funding a $2.2trn domestic infrastructure and social welfare spending plan. And a global agreement on a minimum corporation tax would lessen the chances of US firm inversions and relocation of activities to lower-tax countries, paving the way for the Biden administration to pursue revenue-raising measures at home.
A year's long effort to address the business tax impacts of the digitalisation of the global economy by the OECD's Inclusive Framework has been re-energised. Still, US concerns remain over the unfair targeting of their digital firms, with the EU demanding a reallocation of taxing rights on corporations such as Google, Amazon, and Apple.
The OECD had proposed moving to more market sales-based taxing rights (known as Pillar I) and introducing a global minimum corporation tax at around 12.5% (Pillar II). The proposals respond to changes brought about by the digital economy, where substantial profits arise with minimal market presence. And the locating of intellectual property rights into lower tax jurisdictions can significantly reduce company tax bills.
Under the OECD plans, approximately 2,300 companies would have more of their profits assessed for tax in the countries where they make their sales, and these profits would be subject to a minimum rate of taxation. The proposals aim to apportion taxing rights more evenly between countries and discourage profit shifting.
The US proposals pitched as a countermeasure to a race to the bottom on corporation tax rates, impact the 100 largest multi-national companies, as determined by revenue and profit margin thresholds. The proposals concede changes in taxing rights to a more market-based system but are subject to a minimum corporation tax rate of 21%, much higher than that envisaged by the OECD.