Corporation tax is a hot issue right now. The new Biden administration in the US was elected on a promise that it would make big multinational corporations – often ones grouped under the high-alpha umbrella of “tech” – actually pay taxes on their profits.
That was a bold promise to make, because of a little thing called national sovereignty. In general, a nation has the right to set its own tax rates as its government chooses. Countries such as Ireland, Switzerland, Bermuda, the Caymans, Luxembourg, the Netherlands and Singapore – to name only the top havens listed by the US Treasury – have low rates of corporation tax. (Some have none at all, but that’s a different business model.)
And it’s simple enough, normally, to move a company’s profits to such a jurisdiction. Typically the corporate entity which made the money – say a US company which has made huge revenues selling things in the huge US market – might simply pay some of that money to a partner US company registered in Ireland. Its US costs would then cancel out the remaining US revenues, and the US corporation would book no profit and pay no tax. Meanwhile the Irish partner company would make a huge profit but pay only the relatively low Irish rate of 12.5%. Indeed if the parent of these two companies is a global multinational the Irish company might make a good bit more profit than that, as other corporate arms in other nations also funnelled their profits through Ireland, or some other tax-haven country.
That’s great for Ireland, of course, as it gets to collect a lot of tax money to spend on things. Even a low rate brings in a lot of revenue if it’s levied on enough profits. Funnily enough, Ireland’s increase in public spending in 2020 was the second-biggest in the Euro area, according to the Irish central bank.
All this is much less good for the US and all the other nations around the world who don’t get to collect any tax on big corporations making big money on their territory. This has led countries around the world to engage in a “race to the bottom” over recent decades, lowering their corporate tax rates in a bid to attract companies’ money.
Nobody wins a race to the bottom
But how to stop the race? It’s a difficult thing, compelling sovereign national governments to alter policies which are making them a lot of revenue. Sebastian Shehadi, Political Editor at our sister publication Investment Monitor, suggests that getting a global deal through could take a decade. He writes:
Simply put, Biden is all carrots and no sticks at the moment, and it will take huge carrots to convince the likes of Ireland. Sticks, therefore, will be needed.
However, with Biden still playing Mr Nice Guy, tough-guy approaches might have to wait until a second Democrat administration (assuming this happens). Moreover, for the next year, Biden will struggle to pivot away from the carrot life.
Shehadi is surely right – it would indeed take some pretty large carrots to make Ireland shift its position on corporate tax. And yet, though it is walking softly for the moment, the Biden administration has in fact got out quite a big stick already. This is a proposed new US tax rule, backronymed SHIELD (Stopping Harmful Inversions and Ending Low-Tax Developments).
The details of SHIELD are complicated, but the essence of the idea is simple. As and when SHIELD might be introduced, any US corporate entity which made a payment to an overseas partner corporation in a low-tax nation would not be permitted to deduct that payment from profits for US tax purposes. It seems likely, too, that SHIELD would only apply to multinational groups headquartered outside the US: it won’t attract pressure on the Biden administration from corporate America.
Some tax lawyers are viewing this as a gun held to the heads, not so much of non-US multinational companies, but of tax-haven governments. If SHIELD was added to the US tax code, there would be no point in sending made-in-the-USA profits to Ireland as the company would then have to pay both US and Irish taxes.
Profits from other markets might still be channelled through Ireland, of course, but the USA is far and away the biggest economy in the world. If SHIELD appears on the US books, Dublin would suddenly find a lot less money moving through its local multinational offices – and thus, a lot less flowing into its own coffers. Other governments around the world, meanwhile, would find “their” multinationals, companies like BAE Systems and GSK in the case of the UK, hugely distressed at having to pay relatively swingeing US taxes of 21% on their US profits.
That corporation tax stick is actually quite big
A group of tax lawyers and accountants at international law firm Holland and Knight recently noted dryly:
It is likely that the [US] Treasury Department is using this leverage to force the OECD Inclusive Framework to reach consensus before the SHIELD becomes law.
And after all, the global corporation tax floor being proposed by the OECD and Washington is only 15%. Ministers in Dublin might well be thinking right now that 15% of some money may not, indeed, be as good as 12.5% of a huge amount of money: but it’s a lot better than 12.5% of not much, which is what they’d get in a SHIELD world with no US contribution. Other tax-haven governments are probably making similar calculations at the moment.
Meanwhile in ministerial offices in many other countries, politicians will be getting calls from big multinationals headquartered in their own capitals, pressuring them to toe Joe Biden’s line and get the OECD deal done before SHIELD can happen and they have to pay 21% on their US profits instead of, probably, only 15%.
That’s quite a big stick, then: and it’s not the only one that Biden is carrying right now.
One alternative to the OECD global tax plan, for instance, is digital service taxes – so-called “Google taxes”. In various nations around the world, the debate around corporate tax evasion is focused on Big Tech: the FAANG companies. Facebook, Amazon, Google and the others are actually no more prone to Irish or Dutch based tax evasion than other big companies in all sectors, but they are particularly disliked for doing it, probably because they’re high profile and they don’t bring much in the way of counterbalancing benefits such as decent jobs.
Public pressure in such countries has led to the introduction of special extra taxes levied on all payments made locally to the digital giants. The UK, which introduced its Google tax in 2020, estimates that if it remains in force it will be bringing in revenues of more than £0.5bn annually by 2025. Austria, India, Italy, Spain and Turkey have also brought in such taxes.
Digital services taxes may serve to make politicians look as though they’ve done something about Big Tech tax avoidance, but they don’t do anything about all the other big companies. They’re also unfair, like most sales taxes: their impact in the end is to push up prices by a flat amount. A billionaire’s Netflix bill goes up by exactly the same sum as someone on minimum wage. And from Washington’s point of view, Google taxes are even more unfair as they are targeted mainly at US-based companies.
Yes, you are all sovereign nations and can’t be ordered about. But you will not have Google taxes
Joe Biden’s having none of this. In June, the Office of the US Trade Representative (USTR) announced swingeing tariffs to be levied on imports from all nations with digital service taxes, and a 180-day countdown before the tariffs will be implemented. This was widely taken as an ultimatum: stop fiddling about with Google taxes and get behind the OECD global tax agreement, which will make sure that not only does Big Tech have to pay some tax but all the other multinationals too. It didn’t escape notice that the EU, Brazil, the Czech Republic and Indonesia had all been in line for US sanctions too, but had all dropped their plans for Google taxes before the announcement.
To be fair, the UK for one had only brought in its Google tax as a stopgap measure due to lack of progress in recent years at the OECD tax talks, with the deadlock generally blamed on the Trump administration. The British government says:
The government still believes the most sustainable long-term solution to the tax challenges arising from digitalisation is reform of the international corporate tax rules and strongly supports G7, G20 and OECD discussions on long-term reform. The government is committed to dis-applying the Digital Services Tax once an appropriate international solution is in place.
But it’s nonetheless a fact that the US big stick is there, and the governments of the world are now well aware that unilateral ploys of their own such as digital services taxes are not a viable solution to the corporation tax problem any more. There’s no alternative to the OECD plan, not unless you want your export trade to the US fatally choked off. And there’s a US-imposed deadline on that.
GlobalData Thematic Research analyst Laura Petrone comments on SHIELD and the Google tax tariffs:
Both US initiatives aim to create the broadest consensus possible at the OECD level, as the only effective way to get an international agreement on a minimum corporate tax rate. Biden understands that until the global tax reform is sealed at the OECD level the danger that corporations will continue to try to hide their profits in tax havens will always remain.
It’s possible to suggest, then, that Joe Biden isn’t relying entirely on a carrot-based strategy here. And with less than five months still to run on the tariff deadline, and the prospect of SHIELD becoming US law in this administration, he just might get something done in less than a decade.
Updated to Add: Our suggestion that Biden might be successful in getting his deal turned out to be correct, as G20 ministers met in Washington to sign off on a global corporation tax floor of 15% in October 2021.