President Biden proposes global minimum corporation tax rate

Philip Fisher

President Biden appears to have grasped the nettle and decided that it is time for global giants to pay more tax. Philip Fisher proposals that could raise £300bn each year in corporation tax.

16th Apr 2021

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Philip Fisher

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Those of us who are steeped in the glories of taxation systems struggle to understand why the world at large does not get excited about such an important topic.

It is therefore pleasing to see that not only the OECD but also President Biden and other leading politicians from around the world finally seem willing to grasp a very prickly nettle.

As this column has highlighted over a period of many years, tax avoidance by the richest companies around the globe is out of control.

While politely paying lip service to their obligations to pay taxes that they believe are due, the big guns in the tech sector and beyond seem to have a knack for reducing their liabilities in percentage terms beneath those of all but the very poorest in society.

Even when countries such as France and United Kingdom choose to implement a digital services tax these companies, which sometimes give the impression of believing that they are above the law, and enlist the help of friendly politicians such as former president Trump to apply vindictive tariffs against their challengers.

Biden's global corporation tax plans

It therefore comes as a breath of fresh air to learn that Trump’s successor is now signing up to a two-pronged plan that seeks to put the top 100 companies in their place.

If news reports are to be believed, this could benefit global economies by over £300bn every year. While that might not quite pay for anti-pandemic measures, it could certainly feed a lot of hungry children, support education and fund significant health benefits.

The first proposal is that there should be a global minimum rate of taxes on company profits. Coincidentally, the figure chosen of 21% just happens to be the current rate of corporation tax in the United States.

That would have rung alarm bells in the United Kingdom, where the rate is 19% except that in last month’s Budget speech, Rishi Sunak has introduced a slow increase to 25%.

The Irish will certainly be concerned, with the current rate of 12.5%, while many British dependencies have made their billions by allowing corporations to operate without any tax charge beyond a nominal flat sum.

Biden's tax hike targets top 100

The second part of the proposition is reputedly going to be restricted to only the largest 100 corporations in the world. Given that they include the biggest tax avoiders, it is obviously been determined that this will suffice to remedy the worst excesses.

For decades, experts have been suggesting that the only way to redress the balance is to charge taxes on multinationals based on sales, rather than nominal profits, which have conveniently been shifted to low tax jurisdictions using strategies thought up and implemented by many of our peers worldwide.

Given the influence of those that will be victims of these proposals, there could be a rocky ride before the OECD manages to implement them. But it is hard to imagine that the average voter would object to anything of this kind, which should stiffen the resolve of the legislators.

Effect on global accountancy firms

In addition to hitting the profitability of the global corporate giants, it will also have consequences for accountants in this country and elsewhere.

There seems little doubt that every member of the Big Four and many others have benefited greatly from the tax advice required to rearrange financial affairs in such a way that taxes shifted to locations such as the BVI or the Cayman Islands.

If these dependencies were forced to charge tax at 21%, the avoidance industries which have always been based on dubious moral grounds would presumably disappear overnight.

While that could be disastrous for tax advisers, there can be little doubt that when the likes of Amazon, Google and Starbucks suddenly discover that their liabilities have gone up by a multiple of 10 overnight, they will be beating down the doors of anyone who might be able to help them to mitigate the position - so all will not be lost.

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By Edward Beale

19th Apr 2021 10:26

What about employment taxes? These should be factored in too.

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By AndyC555

19th Apr 2021 13:00

"this could benefit global economies by over £300bn every year."

What? £300bn p.a. that doesn't currently exist will be magically created? What this actually means is that £300bn which is currently in the hands of businesses which have proved they can run successfully and do things like 'employ people' will be placed in the hands of governments which have proved they are great at wazzing money up a wall on their latest politically motivated pet project.

I suppose if you have a 'Scrooge McDuck' picture of business of some fat bloke in a top hat sat on a pile of gold coins in a cave, this might make sense.

So what's the plan? If you are a democratically elected government, voted in on a plan to reduce taxes perhaps to try and attract businesses which will, you know, 'employ people', the Americans can step in and make that pointless. Yay. 21% this year. Then next year why not 30% or 40%? After all if businesses can't get away from it, if the natural defence against avaricious governments is that business can always bugg*r off, what's to stop them? Hey it might magically create £1,000bn. Think how many pet projects that could fund! I mean, it's not as if the current system has dramatically reduced poverty around the world in the last 50 years.

"Charge taxes on multinationals based on sales,.... it is hard to imagine that the average voter would object to anything of this kind"

They might when they realise that the taxes will be passed on to them. I don't notice a wild enthusiasm among voters for VAT.

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By User deleted

19th Apr 2021 15:47

I don't recall voting for Biden so why should he dictate the tax policies of other countries? The more I see of him the more he appears to be an American version of Jeremy Corbyn, left wing, incompetent, stupid, senile, and deluded.

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Replying to User deleted:

By Ruddles

20th Apr 2021 10:11

"stupid, senile and deluded"

Black pot, meet kettle.

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By C.Y.Nical

23rd Apr 2021 22:06

The proposal for global minimum tax rates stinks because it stifles competition.
We know from long and bitter experience that it is competition which makes it possible to create wealth.
We know that when competition is prevented poverty is the result.
Free nations should be free to provide competitive tax rates, so that they can compete with each other, and increase wealth.
If they are not free to do this, two results will follow.
The first result will be ossification We have seen this in every totalitarian state there has ever been. It is an immutable fact of economics.
Second, having lost this freedom, other freedoms will also be lost because if any supra-national body can dictate tax rates it will soon seek to expand its remit beyond taxation to limit the other freedoms which nations currently possess.

The solution to the problem of global businesses paying low rates of tax is to limit the mechanisms which facilitate this.
The most obvious mechanisms are:
- The vesting of intellectual property rights and other rights to intangible assets in Low Tax Jurisdictions (LTJs, aka tax havens), and the payment of fees for use of those rights
- The artificial passing-through of inputs through LTJs and inflation of the cost of those inputs in the LTJ
- The "laundering" of finance via LTJs so that subsidiaries pay excessive costs of finance with the margin accruing in the LTJ
The result of this is that subsidiaries around the world pay excessive costs which absorb much of their operating profits, and the profits arising from these excessive costs crystallise in LTJs with the net benefit accruing to the ultimate beneficial owner of the operating entity.

This problem could be solved by individual countries aggressively challenging the accounting practices of operating subsidiaries.
In simple terms, HMRC could say to the UK subsidiary of a multi-national: 'We challenge these fees you are paying for the right to use the name and logo of your parent; and we challenge the cost of the raw materials you are buying because we have evidence you are paying twice the price anyone else would pay for the same stuff; and we challenge your payment of 10%p.a. interest on your debt when you could borrow the same money here for 3%.'

That would be the best way forward because it would preserve competition, and without competition our children and grandchildren are condemned to lives of grinding poverty.

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