COVID-19 is Changing the Tax Rules for Large Multinationals
Tech Giants like Facebook and Google will find it even harder to book their profits in low tax “havens”, now that the Biden administration is supporting a global minimum tax.
US Treasury Secretary Janet Yellen has put the US tech giants such as Google, Facebook and Apple on notice that the days when they could make liberal use of tax havens to slash their tax bills are drawing to a close.
In a speech on Monday, Yellen signalled that the Biden administration is now onboard with the global push to ensure that large multinational corporate players don’t shirk their fiscal responsibilities.
Yellen said that the US would back a global minimum tax which would apply to multinational corporations, regardless of where they are headquartered.
Such a tax, she noted, would help to prevent the “race to the bottom”, whereby countries slash their tax rates in order to encourage companies to relocate their operations and their profits.
“Together we can use a global minimum tax to make sure the global economy thrives based on a more level playing field in the taxation of multinational corporations, and spurs innovation, growth and prosperity”, she said.
She added that it was important that governments “have stable tax systems that raise sufficient revenue to invest in essential public goods and respond to crises, and that all citizens fairly share the burden of financing government.”
Yellen’s rallying cry, which comes on the eve of semi-annual meetings of the International Monetary Fund and World Bank, comes as governments around the world are looking at ways of addressing the yawning budget deficits they face as a result of the coronavirus pandemic.
Faced with the urgent task of budget repair, many governments are now taking a dimmer view of cross-border tax avoidance arrangements that allow large multinational companies to minimise their tax bills.
Especially since IMF economists estimate that global tax avoidance is draining as much as US$650 billion (FJ$1,757.31 bn) in tax revenue each year from government coffers. The expectation large multinational corporations should pay more tax has been reinforced by the fact that some large corporates were major beneficiaries of COVID-19 support programmes, either through wage subsidies, or because central banks bought their bonds which made it cheaper for them to borrow.
But there’s also an increasing consensus that governments should be making greater use of budgetary measures to reduce inequality and to increase the provision of essential public goods and services. US President Joe Biden, for instance, is looking to fund his ambitious US$2.3 trillion (FJ$4.75tr) infrastructure plan by lifting the US company tax rate to 28 per cent, from 21 per cent at present.
This unwinds much of the sweeping tax overhaul that US President Donald Trump oversaw in 2017, which saw the US corporate tax rate slashed from 35 per cent to 21 per cent, and which resulted in a plunge in corporate tax revenues.
Pressure on multinationals
In contrast, the Biden administration wants to encourage large multinational US corporates to pay their fair share of tax, and to discourage them from shifting their operations and profits abroad to avoid paying US taxes. These large players enjoy a huge competitive advantage over their small domestic rivals which have little scope to reduce their tax liabilities by channelling their revenues through tax havens such as Ireland, Luxembourg, the Netherlands, Switzerland and Jersey.
And few have been as adept in exploiting arbitrage opportunities between different jurisdictions to minimise their tax bills as the giant US tech companies, such as Google,
Amazon and Facebook.
These digital companies – which flourished during the pandemic as customers increasingly went online – have been able to shift revenues and profits to low-tax jurisdictions using complex and opaque corporate structures.
As a result, Amazon reported a modest US$1.8bn (FJ$3.72bn) US tax liability for 2020, even though it earned $US20.2bn (FJ$41.76bn) of income.
This equates to a corporate tax rate of nine per cent, but that’s still much higher than the 1.2 per cent rate that Amazon reported for 2019, or its negative rates in 2017 and 2018. As part of its initiative to combat the growth in global tax avoidance, the Paris-based Organisation for Economic Co-operation and Development, which has come up with two key proposals for better capturing the rich revenue flows of multinationals.
The first proposal would increase the rights of countries to tax the corporate income that large multinationals earn from sales in their territories, regardless of where the company is officially headquartered.
The OECD’s second proposal involves introducing a global minimum level of corporate taxation which would apply to tech giants and other large multinationals.
The OECD estimates the two reforms alone could increase governments’ tax revenues by up to 4 per cent worldwide, or around AU$100bn (FJ$158bn) annually.
Last year, the Trump administration vociferously opposed the proposed new system
for taxing large multinational corporations, with the then US Treasury secretary Steven Mnuchin complaining that it was basically an exercise aimed at taxing Silicon Valley.
European taxes
Washington also threatened to retaliate against European countries that went ahead with their own taxes on revenues of global digital companies.
But this did not deter France, which pushed ahead with its plan to impose a tax – a tax of 3 per cent of total annual revenue from services they provided to French users – on US internet giants including Apple and Facebook.
It’s likely that Yellen’s support for a global minimum tax will reinvigorate the OECD’s efforts to hammer out an international agreement that would allow countries to tax the sale of goods and services to their citizens over the internet, by companies that have little or no presence inside their national borders.
And it could even smooth the path for a wider international deal on minimum corporate tax levels.
Still, it has proved extremely difficult to get countries to agree on co-ordinating their tax policies, because each is anxious to boost economic activity by attracting foreign investors and to ensure that domestic industries are protected.
What’s more, it’s far from certain that a closely divided Congress will approve the Biden administration’s corporate tax increases.
The plan to lift corporate taxes is facing a major backlash from large US businesses, which welcome Washington’s plans for largescale infrastructure spending, but are opposed to the idea of corporate tax increases. Business lobby groups argue that the rise in the US corporate tax rate will disadvantage US companies which will be hamstrung with higher taxes than their foreign competitors. Ironically, the introduction of a a global minimum tax rate would reduce some of the advantage enjoyed by companies based in lower-taxing foreign countries.