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The USA Global Minimum Tax - Ha!

T

he curious case of the tax riddle wrapped in liberty cabbage, sprinkled with freedom fries, encased in the hand of a cheese-eating surrender monkey.

The G7 have agreed it; the global minimum tax appears to be happening, but why now? This should be the question on the mind of all tax advisors. Specifically, why is America spearheading the call for a minimum global corporate tax? As I am sure some will say, someone must pay for the cost of the pandemic and what better time than now to do so? Just like the mythical phoenix of old, it is envisaged that a new tax order will arise from the ashes of the pandemic-ravaged world and the lessons of this harsh experience will mean that the application of this new tax order will be fairer and more equitable. Well, that appears to be what the current narrative is trying to tell us.

However, if one looks beyond the hype, interesting questions begin to emerge and just like the Trojans who gleefully took in the wooden horse at Troy, this seemingly generous and rational tax plan begins to increasingly look like Pandora’s box.

Three obvious questionable points emerge as follows:

1 – Joe Biden’s credentials. Joe Biden has served as a representative of Delaware, the world’s leading tax haven for 36 years in the American Senate. Whilst not a crime in itself, are we are now expected to believe that he has had a ‘road to Damascus’ moment, and his administration is now seeking to repair the tax system within the global community?

2 – Why bother joining? As more counties join the global minimum tax crusade, the economic benefit to any one country that stays out grows as more countries join. The IMF have come out and offered an ‘extreme scenario’ whereby Ireland would see a decline in tax revenue take of €6 billion, there is talk of ‘developing nations’ getting next to nothing and as Hungary has pointed out, this plan appears to be a threat to national sovereignty. In short, there are too many losers in this scenario.

A country that does not join can outcompete the global market via lower taxes. Therefore, it appears that there is more incentive not to join than to join.

3 – The political ‘Gordian knot’. It has been pointed out that the domestic political manoeuvring that any successful global minimum corporate tax would require in many countries makes the politics of trade look enviable.

Part of the reason for this complexity is that many member states of the Organisation for Economic Cooperation and Development (OECD) have federal systems. This fiscal federalism typically reflects political federalism, which, in turn, reflects a country’s foundational political compromises. A uniform minimum tax could, in various federally organised countries, potentially reawaken long-settled constitutional questions about the balance of power between central and subnational governments.

In a federal system, any functioning global minimum corporate tax system would require an unprecedented degree of tax homogenisation and coordination among national, regional, and local jurisdictions. This could be a source of potential loopholes and other troubles in any minimum tax system.  

Now I am sure, dear reader, that you must be thinking - what’s this all about, really? The questions above seem to raise far too many questions than provide answers.

The answer would appear to be encased in the “America first” mentality – all this rhetoric is about protecting the USA tech industry. The global adoption of digital service taxes around the world have spooked American politicians and the tech industry to a greater extent than initially thought.

An example of this has been, after the threats of tariffs, the call by the US to ask countries to roll back unilateral measures once an international tech tax has been agreed upon. Some may point out that this is a reasonable call for harmonisation, however, it has been reported that the US Treasury presentation to the Inclusive Framework made it clear what the thinking behind the plan was, in bold font, it is reported to have said that ‘the United States cannot accept any result that is discriminatory towards US firms.’

What is further disturbing in this tale, is that the American proposal, which is backed by the OECD, is not the only plan on the table, the UN have also tabled a plan, but it appears to be too effective in taxing digital companies and so it does not appear to be as popular with the US.

The UN proposal

The UN plan would grant countries the right to tax digital companies’ revenues based on where the revenues are generated, rather than where the company is resident. It’s been reported that the model would be non-binding and only enacted in bilateral agreements if participating countries sign up to it.

However, as Tove Maria Ryding, Policy and Advocacy Manager at the European Network on Debt and Development, has pointed out, there seems to be an odd competition between the UN and the OECD going on. The UN is looking at developing digital services tax and the OECD is trying to encourage them in favour of a regime that would apply to all industries.

Others have pointed out that the US proposal risk losing legitimacy. Mexico’s ambassador to the UN, Sybel Galvan, has emphasised that you can’t call the rules global, but if the decision-making is not truly global, why would the countries who haven’t been involved in drawing up the rules, voluntarily sign up to follow them? The world’s poorest countries are once again at risk of losing out when the global tax pie gets divided, despite being more in need of tax income than anyone else.

Potential effects

Alex Cobham, Chief Executive at the Tax Justice Network, is helpful in highlighting what may potentially happen, should this plan be implemented. “The world’s eyes were on the G7, hoping that they would throw their weight behind a new tax system that would bring back home to all countries the billions in corporate tax they were robbed of and urgently need to rebuild and recover. However, the G7 finance ministers are proposing to follow OECD proposals that would ensure the G7 themselves take the lion’s share of any new tax revenues – which will in any case be limited by their lack of ambition.”

The Tax Justice Network modelling is also helpful in showing the potential effects of this new regime. For example, a 25% minimum effective tax rate could raise $780bn in additional revenues worldwide – however, this would still leave multinationals with three quarters of their gross profits. Countries outside the G7 could receive $355 billion under the fairer approach proposed.

Should the G7 push ahead with a 15% minimum rate, under the deeply unequal OECD approach, they will leave barely more than $100 billion for other countries – while taking $170 billion just for themselves.

Potential long-term implications

In short, what we have is big tech essentially writing their own tax rate, and what we have seen is that if this US plan is not accepted, then the US is threatening tariffs.

This ham-fisted approach could further fracture the international landscape, leading to more complexity and loopholes – not less. Realistically, will China, Africa, even Russia agree to this? As things currently stand, it would appear highly unlikely.

Additionally, serious questions need to be asked as to whether the OECD is fit for purpose in terms of the global tax debate.

One would have thought with the rise of ‘Black Lives Matter’, the global inequality debate and the legacy of colonialism now coming under scrutiny, that the way this tax plan has been approached would have been handled with greater tact and sensitivity. Instead, the imperial power attitude appears to have prevailed: We will tell you, the poorer countries, what is good for you. Now shut up and suck it up.

Despite all this, there is a solution, but it requires courage and leadership. As the Tax Justice Network has pointed out “even the G7 and OECD recognise that the international tax rules are unfit for purpose. The disproportionate power exercised by these rich countries’ clubs today shows that the way international tax rules are determined, too, is unfit for purpose. It is now well past time for international tax rules to be set democratically at the UN, starting with a UN tax convention.”

Disclaimer: The views of this article do not necessarily reflect Hansuke Consulting Limited.

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Posted
June 2, 2021
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