Global tax cartel joined by 130 jurisdictions flounders


Setting up a global tax cartel is difficult. This lesson is learned by the bureaucrats who devised an effort to prevent corporations from taking advantage of the fact that some countries impose lower taxes than other countries. One year after 130 jurisdictions agreed in principle to institute a global minimum tax rate of 15% on corporate profits and to make it harder for companies to shift their tax liabilities from higher tax countries to countries low tax, the first result is delay and buyers’ remorse.

The Global Tax Agreement, overseen by the Organization for Economic Co-operation and Development (OECD), rests on two main pillars. The first pillar is supposed to allow governments to tax digital companies that sell services in a country but are not physically present there and therefore were not previously taxed there. These companies, of course, are taxed in the country where they are based or where their intellectual property is located, which (unsurprisingly) is often in lower tax jurisdictions. Just as you don’t lure bees with vinegar, you don’t lure corporations by promising to tax them heavily.

Unfortunately, high-tax nations are always looking for more revenue, and their leaders, frustrated by tax competition that robs them of tax revenue they consider their own, see things differently.

Enter the second pillar, which is the 15% overall minimum tax on large corporations. The idea here is simple: no matter where a business is located, it cannot be taxed at a lower rate than specified in the agreement.

Fortunately, so far the redesign has not been implemented. According to a report in The the wall street journal, “Negotiators from the group of countries that signed up in October had hoped to finalize the rules for changes to the first pillar of tax revenue this month, but have now given themselves an extra year.” The global minimum tax is also the subject of objections. Neither the US nor the EU has passed legislation to implement it. In Europe, the Hungarian government vetoed the legislation, and in the United States, the “Build Back Better” plan containing the minimum tax was killed when the legislation failed to pass through Congress.

I’m not sorry. Global tax cartels are as bad as they look. They are explicitly designed to allow unwilling governments to cut excessive spending and create more favorable fiscal environments to raise more revenue. This is bad news for tax competition and fiscal sustainability, and it makes governments less accountable to taxpayers, businesses and workers who would like their productivity to be rewarded with higher wages rather than higher tax bills. for their employers.

In addition, the imposition of global minimum taxes aims to increase effective tax rates and, in doing so, reduce investment, innovation and economic growth that contribute to our standard of living. The OECD proposal would be no different. As the Tax Foundation’s Daniel Bunn points out, one version of the proposal “would have the largest increase in average effective tax rates for investment centers.” These higher rates would reduce future foreign business investment, as well as domestic investment, with implications for jobs and growth.

American officials should know this, since we already have a minimum tax on foreign income from American companies. The ill-conceived Global Low Tax Income Tax (GILTI) was implemented as part of the 2017 tax reform and is already showing the negative impact such taxes can have.

As Dunn and Garett Watson explain, “[GILTI] often operates as a surtax on foreign income from U.S. businesses. A proposal from the Biden administration would make it worse and, according to the Tax Foundation’s model, result in “the tax liability of American companies on their foreign income.” [to] nearly triple over the next decade. It would also put American companies seeking new markets abroad at a competitive disadvantage. Yet the Biden administration not only doubles the GILTI tax, but is also keen to impose a minimum tax on everyone.

Tax systems should inflict the least possible damage while increasing revenue. There is little hope here. An alternative to a global tax cartel would be for high-tax countries to get their finances in order, cut spending, and grow their economies through taxpayer-friendly, supply-side reforms. I won’t hold my breath.



About Author

Comments are closed.