A surprise U.S. drive to overhaul international corporate taxation promises a new era for governments to capture a bigger tax take from some of the most successful global businesses—if only the rest of the world can agree.
Welcoming noises in Europe to Treasury Secretary Janet Yellen’s proposals suggest a good start in shifting what’s been a years-long impasse among more than 135 countries over harmonizing corporate taxes. At stake is shoring up cash-strapped finance ministries bankrolling massive Covid-19 crisis spending.
Representatives leading the negotiations, led by the Organization for Economic Cooperation and Development, said this week they can see an agreement by mid-summer.
American proposals address two objectives: setting a 21% global minimum tax and ensuring that the world’s 100 or so biggest companies pay more in places they actually do business. While questions remain over enforceability, dispute resolution and how poorer economies could benefit, the initiative re-injects momentum into a process that nearly sparked a trade war in the era of Donald Trump.
“Tax is a major financial question and a question of sovereignty. And what is on the table is a real tax revolution,” French Finance Minister Bruno Le Maire told reporters on Thursday. “If we get an historic agreement on global tax, we will have global companies and global taxation that is fairer and more effective.”
Reimagining international taxation has long been a frustrated ambition of finance ministers such as Le Maire. Borderless corporate entities have racked up mountains of barely taxed profits at a time when workers’ wages have stagnated—stoking political tensions.
Getting more than 135 countries with their own priorities and tax systems to sign on to a standardized set of rules on corporate levies is a massive challenge. It would also mark a stark reversal of what Yellen called a “race to the bottom.” The average statutory corporate-tax rate among OECD members slid to 23.3% by 2020 from 32.2% in 2000, according to the Treasury. Back in 1980, OECD statutory rates “were rarely less than 45%,” the Treasury said Wednesday.
Ending ‘Craziness’
Behind the new drive is a pandemic that swelled national debts. The shift is not unlike the regime change toward treatment of income-tax havens such as Switzerland that followed the 2008 financial crisis.
“I see it as completion of work we started 10 years ago,” said Pascal Saint-Amans, director of the center for tax policy at the Paris-based OECD, who has headed the talks. “It puts an end to the craziness where you could reduce your tax burden legally, massively, and in complete contradiction with the spirit of the law.”
The U.S. initiative has prompted a warmer reception from larger countries such as France, whose Treasury coffers have the most to gain by capturing revenue from global companies operating in lucrative domestic markets. Other nations that earn money from hosting multinationals have reservations.