Essay

Seismic: will global corporate tax rate work?

US president Joe Biden’s proposed reforms have given fresh momentum to calls for a global consensus on taxing company profits. Even Pierre Gramegna seems to be on board. But is creating a more level playing field really fair and desirable?

Words DUNCAN ROBERTS Illustrations SALOMÉ JOTTREAU

As the world strives to recover from the impact of the covid pandemic, finance ministers are exploring ways to reboot their economies. Several countries--most notably the United States under the fresh stewardship of president Joe Biden--have even announced bold infrastructure investment programmes as a way of providing much needed economic bounce. But that will require finding additional income through the implementation of stringent fiscal policies.

Raising income taxes that would additionally burden the general populace after they have gone through close to two years of hurt is anathema to most politicians. Biden’s solution is to seek redress from the corporate world, while trying not to punish the middle classes who own the small businesses that successive presidents have claimed are the backbone of the country. So, he eschewed plans that had been mulled over to increase payroll tax contributions for social security, for example.

Biden is going after big business and those companies that use base erosion and profit shifting (Beps) to minimise tax on their profits. Biden wants, for example, to double the US minimum rate for global intangible low-taxed income, or Gilti, from 10.5% to 21%--the current rate of corporate tax in the States, which the president also wants to increase to 28%.

A cornerstone of the Biden administration’s proposals has been the call, outlined by treasury secretary Janet Yellen in a speech to the Chicago Council on Global Affairs, for a global corporate minimum tax of 21%. This would end what she called a “30-year race to the bottom” and ensure a more level playing field that would spur “innovation, growth and prosperity”.

The backlash was swift. Fortune magazine said the plan would “create an Opeclike tax cartel” that “amounts to tax policy imperialism, trampling over the economic sovereignty of small export-oriented countries”. Foreign Policy said it was a bad idea whose likely failure would not only embarrass Biden, “but could also empower countries seeking to undermine the liberal international order, especially China and Russia”.

for Economic Co-operation and Development and the G20? Negotiations, which have been ongoing since 2019 and now involve over 139 countries, are seeking to implement measures targeting both Beps and a global minimum tax.

Well, the Biden announcement has certainly given the negotiations fresh momentum and on 4 May International Monetary Fund managing director Kristalina Georgieva lent her institution’s weight behind the idea. Saying the IMF was “particularly optimistic” that agreement could be reached this year, Georgieva argued that it was urgently needed to avoid, “down the road, the risk of spiralling into a chaotic tax or trade war where everyone loses”. And sources say that representatives leading the OECD negotiations are confident an agreement could even be tabled by mid-summer.

Among experts in Luxembourg there also seems to be agreement that Biden’s backing was crucial to the negotiations. “Reaching consensus is going to be a bit easier, of course, with the US on board,” says Bart Van Droogenbroek, partner and tax leader at EY. “Maybe the US will want to discuss taxation of the digital economy in Europe, or through the rest of the world. So, there may still be a chance that consensus could not be reached. But I think the international community has a good opportunity here.” KPMG’s partner and head of tax Sébastien Labbé says that although negotiations among the 139 countries at OECD/ G20 level “remain confidential at this stage”, the “shift in position of the new US administration towards multilateralism” and the content of Yellen’s speech “have been globally seen as having an accelerated impact on the prospects of reaching an agreement”.

However, Labbé stresses that the implementation of measures reallocating country taxing rights and establishing minimum corporate taxation really “only constitute an additional step” to multiple recent achievements in reforming the international tax system. These include EU antitax avoidance directives ATAD I and ATAD II, mandatory disclosure requirements under the DAC 6 EU directive on administrative cooperation, and country-by-country reporting requirements for large multinationals.

Luxembourg’s finance minister Pierre Gramegna (DP) also appeared to come out in favour of creating a more level playing field. “We need more solidarity. We need to break the mould of many multinationals trying to reduce their tax-

STATUTORY TOP CORPORATE INCOME TAX RATES 2020

Sources OECD, KPMG and Tax Foundation

HIGHS AND LOWS

Comoros at 50% has the highest top corporate tax rate, while Barbados is the lowest at 5.5%. Luxembourg at 24.94% is slightly above the EU27 average of 21.47%. Portugal at 31.5%, Germany at 29.9% and France at 28.4% have the highest in the EU. The lowest rates in the EU are Hungary at 9%, Bulgaria at 10%, and Cyprus and Ireland both have a top rate of 12.5%.

ation close to zero,” Gramegna told Bloomberg in an interview on 8 April. “Luxembourg is very pleased that this discussion is taking place. The global direction is the right one.”

Small countries, specific considerations Gramegna did concede, however, that EU countries like Luxembourg or Ireland “have specific considerations to value and put forward that need to be taking into consideration.” This is a view shared by Ireland’s finance minister, and current head of the Eurogroup, Paschal Donohoe. “I believe that small countries, and Ireland is one of them, need to be able to use tax policy as a legitimate lever to compensate for the advantages of scale, location, resources, industrial heritage, and the real material and persistent advantage that is sometimes enjoyed by larger countries,” Donohoe said at a 21 April webinar on international taxation. But Ireland, Luxembourg and the Netherlands, which has also used lower tax rates to eke out economic advantage, have all come out in favour, in principle at least, of bringing stability to the international tax framework. Dutch state secretary for finance Hans Vijlbrief was cited in the Financial Times on 14 April saying that the Biden plan was a “huge step towards finding global solutions and developing effective rules”.

The public sentiment is there, but several observers think that when it comes to the final furlong in the negotiations several countries may play hardball. In an indication of how Malta might react, its six MEPs broke ranks with their respective political groups in the European Parliament to vote against levying a 21% minimum tax on digital-based companies in the EU. And Cyprus’s finance minister Takis Klerides said the Yellen proposal was “impractical and makes no sense in its current form”.

Indeed, how the new rules will affect the EU is another question altogether. For years, attempts to introduce similar tax harmonisation have been stymied by the potential of a veto. Labbé adds a note of caution. “The EU should.... be sensitive with respect to timing of implementation and ensure appropriate guidance and overall coordination among all the countries to make sure that EU companies are not at a disadvantage.”

“Smaller countries may face a bit more of a challenge to implement the possible OECD/G20 INCLUSIVE FRAMEWORK

Source OECD

Talks are taking place on 15 measures to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.

139

Countries are collaborating on the implementation of the Beps package at the OECD

90+

Countries and jurisdictions have signed the Multilateral Instrument on Beps

$100bn$240bn

Are lost annually due to tax avoidance by multinational companies

new rules. Finally, benefits need to outweigh the costs,” says Van Droogenbroek. “Otherwise there may not be such a big global consensus. And the consequences will be that headquarters will move to those countries that are not part of the framework, and then it will totally lose its purpose. Then the dangers are high that there will even be more profit shifting, basically.”

The other problem is that the investment in administrative oversight that’s going to be required is going to be huge, according to Van Droogenbroek, and he warns against unduly burdening SMEs. “It will be important that the focus on the new rules remains on large multinationals, and that small and medium sized companies are kept out of scope,” adds Labbé.

But, writing for The Conversation, University of Sheffield professor Sharif Mahmud Khalid says a global minimum rate will not end creative accounting. “Yellen’s proposal is no magic bullet and it’s targeting a problem that is not what it appears.”

Sovereign flexibility Another argument is that introducing global minimum rates would remove the flexibility for different nations to pursue policies that might mitigate the impact of crises like the coronavirus pandemic. This doesn’t quite wash with Van Droogenbroek. “The decision of how a country taxes its residents and non-residents on income derived from that country is a totally sovereign decision. That’s clear.” And Labbé concedes that while there have been discussions on the impact on sovereign flexibility surrounding the proposed rules, in the end they are “a global solution... that should be seen as a new way of helping governments to preserve their tax base and to raise funds to finance their investment projects”.

In any case, even those countries in the EU seeking to lower their rates this year will not be too seriously impacted. France has passed legislation that will see its corporate rate progressively reduced to 25.83% by 2022. Sweden’s new rate of 20.6%-down from 22%--is only just below the proposed 21% threshold. That would still allow companies like Spotify to thrive in Sweden, which is a hotbed of new-economy entrepreneurship.

As for affecting Luxembourg’s competitiveness, Gramegna reckons that “taxation will play less of a role in the future in attracting companies if we have a common framework”. He cited the grand duchy’s AAA rating status as a draw. “Companies choose to establish themselves in Luxembourg because of its geographic location, its multilingualism which can’t be found in the same way in any other country, the general regulatory framework making it easy to do business, and its economic and political stability,” says Labbé. Van Droogenbroek says that talking to clients, they are much more concerned about how it is possible to integrate a company. Luxembourg’s attractiveness, he argues, is “about the total value chain, and it’s much less about tax”.