We all know that life is not fair. Especially at tax time. For individuals it is a time of paperwork, worries and disbursements. Most taxpayers work in one place and pay their taxes there.
For large companies, it is also a time of paperwork and worry. However, they often work in multiple countries and may try to move the earnings abroad in search of tax advantages. In many cases, they get away with it. Legal loopholes have allowed many American businesses to avoid a lot of taxes over the past 40 years as, around the world, corporate taxes have been falling for years.
Creating a universal protocol to prevent companies from seeking a satisfactory tax jurisdiction is not a new idea. In response to mounting pressure to impose a tax on digital services offered by big tech companies like Google and Facebook, which sell goods and services around the world, the OECD has been trying to reach consensus on how to do it. And where.
In the talks, the option of an international minimum tax for companies has been considered. So far, no agreement has been reached, which would require a great boost.
The coronavirus pandemic has brought the world to a crossroads. The global economy has been on a roller coaster ride for the past year. Millions of people have been laid off, or have had to permanently close their businesses. Millions are heading towards poverty. Governments are desperate for liquidity. So the headlines announcing that big multinationals like Nike and FedEx are avoiding federal income tax are not sitting well. And they shouldn’t.
Like clockwork, companies will issue reassuring statements saying they “comply with all state, federal and international regulations.” Just because refunds, deductions or exemptions are legal does not make them correct, especially at a time of enormous human suffering and historic global debt.
A race to the bottom
In the United States, seeking liquidity to offset the huge expenses caused by COVID-19, the Biden administration just announced that it will increase the corporate tax rate from 21% to 28%, and promised a national minimum tax for reduce those who pay nothing. This is a welcome change. Now it must be enforced. Tax authorities must have adequate funding and means.
However, corporate tax evasion is a much broader problem, and on Monday (04.05.2021) US Treasury Secretary Janet Yellen noted that she was fed up with endless conversations. She will grab the bull by the horns and bring the issue to her G20 colleagues to find a solution.
“We also need to get out of a 30-year run on corporate tax rates. It’s about making sure governments have stable tax systems that generate enough revenue to invest in essential public goods and respond to crises, and that all citizens fairly share the burden of funding the government, “he wrote on Twitter.
Yellen is right. The United States is not only looking at its own companies, but the plan is to push for a global minimum tax to prevent companies from going to other countries in search of lower taxes.
No matter where companies claim to be based, they will have to pay. It refers to countries such as Ireland and tax havens in the Caribbean and Europe. It also targets the big US tech companies that send “royalties” around the world, regardless of where they actually make the money.
Incentives for tax non-competition
It will be hard work for the United States, and Yellen knows that the country cannot do it alone. “Credibility abroad begins with credibility at home,” he wrote. Updating the United States tax code will be a signal to others. It is, at the very least, a wise first step.
It will not be easy to convince other countries to give up their competitive advantage by raising taxes. If not, reluctant countries could be sanctioned, being excluded from doing business in the United States, or from the American banking system, making it difficult for them to access dollars to do business.
Businesses are complaining about current poor growth and fatigue from the pandemic. For them, this is not the time to change the rules. Both a minimum tax at home and a global version could force them to pay more than foreign companies. Although a quick look at the historical ledgers shows that companies, so far, have been adapting well.
Even if taxes were higher in the United States, that could be seen as the cost of doing business in the world’s largest economy. An expense that most companies would probably gladly pay for in the end.
The poorest countries could also benefit from not having to offer low tax rates to attract businesses. A common global standard would help fill its meager public coffers. Even for rich countries, additional and constant tax revenue would be welcome right now.
However, for any international regulation to work, most countries in the world will need to adopt and begin enforcing the law at the same time. A bad apple could ruin the cake. We are still at the beginning of long negotiations. The United States must take the initiative. It will be an uphill battle; the most difficult thing will be to establish a tax rate that is accepted by all. However, it is worth fighting to create a level playing field. One that can make life a little fairer for everyone.
Author: Timothy Rooks