We've said it before and we'll say it again, there's something about those who work on tax policy and their love of acronyms. US politicians, or at least their staffers, are no exception to the rule. In fact, they appear to come up with an acronym then work backwards to the law they want. President Biden's Made In America Tax Plan (with its SHIELD) is a case in point.
The main aspects of the MIA plan are:
- increase the headline rate of corporation tax (CT) from 21% to 28%;
- 15% minimum tax on the book profits of the largest companies;
- double the GILTI (global intangible low-taxed income) tax to 21% and stop off-setting low taxed income with tax from high tax countries;
- make the already draconian inversion rules even more so;
- use the tax system to stop globalisation; and
- the one that has been catching the journalists' eyes – a worldwide minimum tax rate.
What makes this plan unoriginal and possibly doomed to failure (from a technical point of view at least) is that it doesn't seem to address the structural problems with the US tax system and will simply add another layer of complexity. This is bound to lead to unintended consequences and loopholes with years of litigation to follow. That's if it even gets enacted.
We're not into gambling, but if we were, we'd bet on the MIA not getting the 10 Republican votes it will need in the Senate to avoid being a reconciliation bill. Furthermore, you'd be brave to bet that it will even get to the 50 overall needed for Vice-President Harris to break the tie. The problem is that left leaning Democrats might think it doesn't go far enough whilst those in the centre think it's already too much, thus causing it to go missing in action...
Lipstick on a pig...
The issue that has got the politicians hot under the collar is the perceived unfairness of US multinationals who bank profits offshore, profits that the US believes should be taxed by Uncle Sam.
However, rather than plastering the pig with the proverbial lipstick, how about going to the root cause of the problem? Why are US multinationals able to cause this problem? The answer is the Subpart F rules plus allowing taxpayers to "check the box" for non-US entities.
A better approach would surely be for the US Government to decide what profits it wants to tax and design the rules that allow them to do that, not as a new layer placed on top, but at the source of the legislation. If there are problems with Subpart F, change Subpart F. If all the "check the box" rules do is allow US companies to do what they could do by other routes, block those routes and repeal "check the box," instead of treating it as some sort of unalterable truth.
Do as I say or else!
This approach would also allow the US to decide on the taxation model it wants without having to try and strong-arm other countries into agreeing to a minimum tax because sorting their own tax system is filed under "too hard". For example, Ireland has its 12.5% CT rate for trading companies. Rather than forcing Ireland into increasing its CT rate (and causing the diplomatic ructions we are now seeing), redraw the Subpart F rules to tax the relevant profits in the US with a credit for the Irish tax. This solution is in the US's own hands and does not impose on other states in an effort to address the shortcomings of its own tax system.
Now let's look at the proposals for the inversion rules. There is absolutely nothing wrong with a rule that makes a company resident based on where its management is carried out; in fact, it is a sensible rule as it allows substance over form to apply to company residence (well, more so than with just an incorporation rule). But to apply it based upon where the shareholders are is overreach and setting the limit at 50% is way too low given the large proportion of US Funds that are likely to own stakes in both groups. Plus, will the US allow tax treaties to do their work or will this be a unilateral power and tax grab by continuing the concept that their inversion rules are not subject to tax treaties? Based on past history we think we can hazard a guess that the words treaty override will be appearing on this one.
The US corporate tax system, like most tax systems (including the UK's it has to be said) has some fundamental flaws, but rather than grandstanding and taking the populist route while probably not achieving the stated aim, and also not fixing those flaws, President Biden should give up on his MIA, show Statesman like qualities and actually fix the underlying problems; however, given the realities of the US political system we appreciate we might as well ask for the moon.
The G7 Tax Plan
Following on the heels of Biden's MIA, the OECD and G7 (with the US as a driving force in both) have been pushing their own global tax agenda which also includes, funnily enough, a minimum corporate tax rate. As has been widely reported in the media the G7 finance ministers met in London on 4-5 June to discuss and ultimately sign-off on a proposal supporting a 15% global minimum tax to be levied on a country-by-country basis. They also committed to reaching an "equitable solution" on the allocation of taxing rights (which is of course the key to whether this has any chance of working). It is notable that the US originally called for a 21% rate, but this was reduced to 15% by way of compromise.
The Two Pillars
Central to these discussions is the digital economy and a desire to introduce a global minimum corporate tax rate as proposed by the OECD's Inclusive Framework introduced in 2019, central to which are Pillars I and II. It is also aimed at preventing a race to the bottom, whereby countries reduce their corporate tax rate in an attempt to win business (of course, the UK has jumped the gun and announced in Budget 2021 that our CT rate will increase to 25% from 1 April 2023 quashing any notion that post-Brexit we would seize the initiative and become ultra competitive in terms of tax).
This two-pillar approach is designed to reset the way in which corporate tax is levied. It is, in effect, a type of formulary apportionment or unitary taxation (albeit a watered down version, and one that doesn't seem to gel with the OECD's view of formulary apportionment in the transfer pricing guidelines). Pillar I allocates a portion of a multinational entity's residual profit to the jurisdiction where the revenue is sourced (the "market country"), whilst Pillar II looks to the introduction of a global minimum tax rate (15%).
The allocation key awards taxing rights to the market country on at least 20% of profits exceeding a 10% margin for the largest and most profitable multinational enterprises. Some of those profits would be allocated using a formula rather than the arm's length standard.
There's no doubt that reaching a consensus at G7 level is an achievement, but it's not a given that the OECD's proposal will see the light of day as it must also be approved by the G20 and the "inclusive framework" of 139 countries. For one, the EU (or rather certain Member States) will quite clearly be impacted by an enforced tax hike. The Republic of Ireland, for instance, has been vocal in its opposition to a global minimum, citing (quite rightly to my mind) that smaller economies need to be more competitive if they are to survive let alone prosper; and tax is one way of achieving this.
Various member states (Ireland, Poland and Hungary) have made it clear that they will not accept a global minimum rate unless there are exemptions or carve-outs. The UK has also sought to protect its own interests by proposing that the financial services sector is exempt. And herein lies the problem: for this policy to succeed, countries will be required to relinquish their sovereign right to set their own tax rates. Tax rates are so embedded into individual economies that removing the ability of countries to chart their own course can only lead to the richest and biggest getting err bigger and richer at the expense of the others, as anti-poverty campaigners have pointed out.
Two points here spring to mind:
"No taxation without representation" was a slogan that came to prominence in the American Revolution, used by American colonists who argued that, as they were not represented in the British parliament, taxes imposed upon them were unconstitutional. The same must be said for the OECD's proposal as championed by the G7 – that the right to set one's tax rates has been abrogated to Washington.
This is surely the thin end of the wedge and countries should oppose this development with all their resolve.
Secondly, and related to the first thought, is the grim reality facing the aforementioned Member States that oppose the minimal global rate: they may not have a choice but to acquiesce. Why? Because the Covid Recovery Package allows the EU to borrow up to €750bn in the financial markets and then distribute this to Member States to help them recover from the economic havoc wrought by the reaction to SARS-CoV-19. Of course, the EU has significant discretion over who gets what and when, in other words it holds the whip hand and can use this as a lever to push through its agenda. It has been reported in the press that Ireland has already been spoken to by the Headmaster...
We live in interesting, if not frightening, dystopian times.
Originally published June 2021.
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