The US offer on reforming international corporate taxes is good news. The mooted compromise would not only be a victory for multilateralism and break the deadlock that has seen ad hoc digital taxes proliferate. It would also be a means of ensuring that companies visibly pay their fair share as the world begins to recover from the pandemic.
The global system of corporation tax, as embedded in international treaties, has long needed an overhaul. It was created for an age when capital investment meant spending on physical assets such as factories or farms with a presence in a defined location. But it has struggled to cope with the rise of “intangibles” where assets can be wherever a company decides. This has encouraged a “race to the bottom”, with smaller countries vying to offer the lowest rate to attract multinationals.
US president Joe Biden’s latest offer is based on twin pillars suggested by the Organisation for Economic Co-operation and Development, the rich country think-tank. The first would establish a “taxing right” for countries based on the portion of sales of “consumer-facing” companies in their territory. It would allow, among other things, European countries to tax more of the profits of US tech giants such as Apple or Facebook.
The other pillar would create a new global minimum rate. Governments could demand that companies topped up their payments until they reached this agreed level. This would prevent a “beggar-thy-neighbour” approach that could undermine the Biden administration’s attempts to fund its social and infrastructure spending through higher domestic corporation tax — which could otherwise see big companies make further moves to tax havens.
A pact between the large rich countries would allow both the Europeans and Americans to get what they want. It would also enable Biden, and his Treasury secretary Janet Yellen, to show that the hard edges of globalisation can be smoothed better through engagement with allies than the go-it-alone “America First” policy of his predecessor. Donald Trump blocked an agreement, seeing it as just an excuse for Europe to target US businesses. For their part, France and the UK launched new unilateral digital services taxes; India is also toughening its taxes on foreign tech companies.
Europe should now embrace the US proposal and make the most of the opportunity. As part of the compromise, the US wishes to expand the scope of the OECD package to all large international companies. That could mean that Europe’s multinationals, from German car manufacturers to French luxury goods makers, pay more. Focusing on only the biggest companies is not perfect but it is simple and would move the world a substantial distance in the right direction.
As a global minimum, the 21 per cent rate suggested by the Biden administration is too high. A lower level would still afford governments the effective autonomy to set higher rates if they wish, especially with the new sales-based taxing rates in place. Governments must not be tempted to see corporations as an endless source of politically-convenient tax revenues: ultimately, all tax raised from business is paid for either by consumers, shareholders or workers.
There are, nonetheless, economic gains to be made from a new international agreement. Clear global rules on how corporations ought to be taxed can reduce the incentive to engage in wasteful efforts to game the system. While corporate taxes are inherently distortionary, businesses do need a social licence to operate; contributing to the government-provided services they depend on is part of that. A global minimum corporation tax must reflect a compromise on these principles too.