By DAVID McHUGH, AP Business Writer
FRANKFURT, Germany (dpa) – How can governments prevent multinational companies from avoiding taxes by shifting their profits to low-tax countries?
For nearly a decade, nations have grappled with this issue, trying to discourage companies from legally evading taxes by resorting to so-called tax havens – typically small countries that attract companies with low or no taxes, even though companies have little business there do .
International discussions on the matter picked up pace after US President Joe Biden proposed a global minimum tax rate of at least 15% and possibly higher. The proposal was supported by other major economies such as France and Germany and the prospect of a new approach to international taxation could be reached this year.
At least that is the aim of the Organization for Economic Cooperation and Development in Paris, which oversees the talks between more than 140 countries.
A possible endorsement of the minimum tax idea at the meeting of the Group of Seven Treasury Ministers on Friday and Saturday in London could increase the momentum towards an agreement.
US Treasury Secretary Janet Yellen has argued that a global minimum would end a destructive “race to the bottom” in international taxation. According to the London-based advocacy group Tax Justice Network, governments lose $ 245 billion to tax havens annually. If that money were instead available to governments, they could use it, among other things, to meet their high pandemic aid costs.
Here are some key questions:
WHAT IS A GLOBAL MINIMUM BODY TAX?
With a global minimum, countries would change their tax laws so that if one of their companies made profits that were untaxed or lightly taxed abroad, that company would have to pay additional taxes domestically to keep its rate to the minimum. That said, the home country would raise the offshore income tax rate until it reached the minimum.
This would be below corporate taxation worldwide. It would take away the incentive for companies to shift profits to low-tax countries, so the reasoning, because if these companies escape taxes abroad, they would have to pay them domestically anyway. An agreed global minimum would also weaken the motivation for countries to introduce low tax rates in order to attract companies in the first place.
Domestically, Biden has proposed raising the US tax rate on corporate overseas profits to 21%. That would be an increase over the laws passed under his predecessor Donald Trump, which range from 10.5% to 13.125%. Critics argued that this rate, coupled with exemptions, allowed companies to minimize taxes on their overseas income.
Even if the US interest rate is above the world rate, the difference could be small enough to remove the greatest scope for tax manipulation.
Corporate profits have been migrating to tax havens for decades, often through complex tax avoidance programs. From 1985 to 2018, the global average statutory corporate tax rate fell from 49% to 24%, shifting the tax burden from companies and their shareholders to workers’ wages.
In 2000-2018, US companies posted half of all foreign profits in just seven low-tax countries: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland. Although small countries charge a low rate, they can generate significant income for them. The practice costs the US Treasury Department approximately $ 100 billion in lost revenue annually.
HOW DOES THIS AFFECT ORDINARY PEOPLE?
Different ways. Taxes on the profits of multinational corporations are ultimately paid by the shareholders of those corporations – a group that is generally above average wealthy. As the tax burden on corporate revenues has declined, the overall tax burden has tended to shift to wages and labor – in other words, from generally wealthy shareholders to ordinary workers.
Another cause for concern: According to the OECD, large companies that operate across borders enjoy an unfair competitive advantage by benefiting from international tax avoidance strategies that are not available to local companies.
HOW DO COMPANIES MOVE PROFITS TO FIND THE LOWEST TAX RATE?
While some tax avoidance programs are illegal, most are completely legal. Part of the problem is the nature of the modern economy: it is increasingly based on intangible assets like brands, software, and other intellectual property. These are easier to move than physical assets like factories.
One way of shifting tax liability is through a profit-sharing agreement. In doing so, costs and profit shares are assigned to a subsidiary in a low-tax country. Another option is to move revenue from copyrighted software or other intellectual property to subsidiaries in countries where that revenue is barely or not taxed at all.
THE DISPUTE ABOUT “DIGITAL” TAXES
Part of the OECD discussions focused on the taxation of companies doing business in countries where, often because the companies’ business is internet-based, they have no physical presence and therefore pay little or no tax on those sales. France has enacted a 3% “digital services tax” on revenues believed to have been generated by large companies in France – a measure aimed at US tech giants such as Google, Facebook and Amazon. Other countries have followed suit. However, Washington has branded such unilateral taxes as inappropriate trade practices that unfairly target US businesses.
The Biden government is proposing to solve the problem by compiling a list of the 100 largest and most profitable companies in the world – regardless of their industry – and having them taxed by countries based on their local sales. The idea would be for other countries to lift their unilateral digital taxes and end the trade tensions that it creates.
WHERE DOES THIS PROCESS RUN FROM HERE?
Every agreement faces hurdles. An important sticking point could be the setting of the global minimum rate. Low-tax countries such as Ireland, which are also participating in the talks, may oppose a higher rate. Irish Prime Minister Paschal Donohoe has described the Irish interest rate of 12.5% as “a fair interest rate”.
Agreement on all or some of the issues could come at a meeting of countries in the OECD process this summer, followed by approval by the group of 20 finance ministers meeting in Venice in July, and then a final G-20 decision – Leaders’ summit in Rome in October.
Even in the absence of a negotiated global agreement to sign, coordinated unilateral government action could actually impose a minimum tax. If big enough multinational economies, like the United States and large European countries, make it clear that they will tax profits stashed in tax havens, it could accomplish much of what the talks are intended to do.
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