PERSPECTIVE

Will Biden's push to lift global corporate taxes end in race to the bottom?

The risk of the American president's proposal for a global minimum rate is that 15% becomes a de facto ceiling.

Published Sat, May 22, 2021 · 05:50 AM

GOVERNMENTS wanting to stop big businesses from shifting profits to low-tax jurisdictions have a carrot and a stick at their disposal.

The stick involves regulating practices such as corporate inversion, aggressive transfer pricing and licence royalties so that tax avoidance is effectively outlawed.

The carrot involves lowering your own tax rates so that the advantages of moving profits offshore disappear.

You might think the latter approach, which starves the government of revenue, would be less attractive for politicians. Still, it's the result that a decade of international efforts to crack down on tax base erosion and profit-shifting seem to be headed towards.

The administration of US President Joe Biden is proposing a global minimum rate of 15 per cent as part of its plans to reverse Trump-era corporate tax cuts and lift the level in the US to 28 per cent.

While that's substantially lower than the 21 per cent rate proposed in the initial drafts of the plan, it's likely to be the highest that's achievable, given the opposition from low-tax European countries and their veto power over the European Union's position on the issue.

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The risk now is that 15 per cent becomes not just a minimum, but an anchor for maximum tax rates as well.

In an era when the world was supposedly focused on tackling international tax avoidance to repair the government budget holes left by the 2008 financial crisis, tax minimisation has boomed as never before.

As we've written, the group of offshore centres including the Cayman Islands, Luxembourg and Singapore has received more foreign direct investment in each of the past 10 years than any single nation (the investments in question are mostly in the form of the paper accounting fictions needed to support avoidance strategies, rather than physical property, plants and equipment). International trade in royalties and licensing fees - the lifeblood of tax avoidance strategies - is growing faster than trade in conventional goods and services.

It's hard to see how this situation is going to reverse. The handful of countries that operate as offshore centres have economies built on their low corporate rates and the advantages of multinational enterprises having "brass plate companies". The large firms that take advantage of the system, too, are dependent on tax strategies to maximise their returns to shareholders.

As a result, governments wanting to crack down on profit-shifting face clamorous counter-lobbying through both diplomatic and business channels as they try to work their way through a shifting legal morass of regulations and tax treaties. Take the European Union's (EU) attempts to use a list of tax havens to prevent such activities. The outcome is "confusing and ineffective," the chair of the EU parliament's tax subcommittee said in a February statement.

The more likely outcome of the current round of reform will be a continuation of the decline in corporate rates that we've seen for four decades. Even amid the push to prevent tax base erosion in recent years, 24 of the 37 members of the Organisation for Economic Cooperation and Development have cut their corporate tax rates since 2008, while just seven have raised them. Statutory corporate tax rates have trended downward by about 5 per cent a decade since 1980 to the current situation, where the average sits at around 24 per cent. Nations that want to compete with lower-taxed jurisdictions may find the pull of 15 per cent irresistible.

That's bad news for the world. The availability of complex tax avoidance strategies for companies large enough to pay the requisite legal and accounting costs entrenches the power of incumbent businesses and makes it harder for smaller, more innovative companies to compete.

With corporate profits making up an ever-increasing share of gross domestic product, the benefits of minimisation flow not to the public in general, but to those wealthy enough to hold substantial share portfolios. Government budgets, meanwhile, end up being balanced with more regressive measures, such as sales, payroll and social security taxes.

The siphoning of profits and taxes from major economies to tax havens over past decades has fuelled deepening inequalities and rising populism quite as much as the offshoring of supply chains.

If the world isn't able to tackle it now, it shouldn't expect those problems to go away any time soon. BLOOMBERG

READ MORE: US floats 15% global minimum tax on corporate profits

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