The New 15% Global Minimum Tax: Solution or Subterfuge
“U.S. multinational companies are avoiding $120 billion by artificially shifting profits to Bermuda and similar places.”
-Gabriel Zucman
This is the fourth post on a series about how multinational corporations are permitted to pretend that sales made in a country like the US are made in a tax haven and taxed minimally or not at all. The series begins here.
In 2021, headlines blared of a great breakthrough in taxing multinational corporations, especially big tech. The OECD (The Organisation for Economic Cooperation and Development) announced a time to celebrate. A hundred and thirty six countries agreed to enforce a tax convention with a global corporate tax rate of at least 15% producing a supposedly fairer system of taxing profits where they are earned.
But will it do what it claims, or will it be another piece of legislation that uses complexity to hide ineffectiveness?
Before this reform, corporations could (among other dodges):
* pretend that sales made in the US were made in a tax haven
* deduct fictional expenses
* deduct its own intellectual property royalties paid to a wholly owned subsidiary
- all perfectly legal because governments permit them in their tax codes.
The reform could be a simple and straightforward solution. There is no need for the US, or any country, to seek the cooperation of other countries to tax sales made to a consumer in their country or disallow manufactured deductions.
* The US tax code could specify that a sale in the US is a sale in the US and taxed in the US.
What Does the New OECD Reform Do?
The new tax works on a complex two-pillar system
Pillar 1
* applies only to mega corporations, those that have worldwide revenue over €20 billion and profit greater than 10%.
* it allocates 20 to 30% of their residual profits to countries where the consumers or users are located (where the sales were made).
Looking for the loophole. Why the 10% qualification? Which corporations are exempted by this? Corporations keep their financial reports a closely guarded secret so it’s hard to estimate. However, we do know Amazon’s worldwide profit: it is 6%.
Now we know why the 10% exemption.
So, Amazon won’t be making any allocations to countries it has shifted profits out of under Pillar 1. And if not Amazon, then how many companies?
Pillar 2
* imposes a global minimum tax of 15% on all signatory countries
* only applies to companies that have revenues over €750 million
* has top up tax rules so that if a corporation or its subsidiaries shift profits to tax havens (signatories or not) that charge below 15%, the home company (where a corporation is headquartered) can top up the tax to 15%.
This 15% minimum tax:
* Makes it highly unlikely the US will ever raise its corporate tax rate above 21% as it was in pre-Trump days.
* It leaves an incentive to shift to a tax haven at 15%. That’s still a savings of 6%, which on $100 million is $6 million- a sizeable saving.
Additionally, the top up provision will benefit the tax havens. Switzerland was among the first to raise its taxes to 15%. As Swiss Finance Minister Ueli Maurer correctly realized, “If Switzerland doesn’t take the extra money, others will.”.
According to Dominik Gross of Swiss based Alliance Sud in a guest blog for the Tax Justice Network titled, The Global Tax Rate Is Now a Tax Haven Rewards Programme, And Switzerland Wants in First, h e explains Switzerland is already planning to use the additional revenues from the domestic minimum top-up tax to reward the tax abusers. The new revenue will be directed to giving grants and subsidies for research and development and such to corporations that profit shift to Switzerland.
Undoubtedly, the other tax havens will follow Switzerland’s lead.
NEXT POST: Is the OECD sincere in its attempt to end profit shifting? We have a way to check.
Originally published at https://jandweir.substack.com.
