Recently, U.S. Treasury Secretary Janet Yellen said the United States is working with other G20 countries on a global minimum corporate tax rate agreement that would stop the race to the bottom.
While the agreement would help combat some long-standing global problems, it would also curtail many countries’ competitiveness and undermine their tax sovereignty in the long run.
In fact, the global minimum corporate tax rate was not first conceived by the United States. In recent years, the OECD — the Organisation for Economic Co-operation and Development, with 37 member countries — has been promoting global tax consultation focusing on two areas. One is to develop a system design for the taxation of cross-border digital services; the other is to set a global minimum corporate tax rate, mainly to solve the problems of tax base erosion and profit shifting.
At present, the motivation for the U.S. to propose a global minimum tax rate is obvious: It is based on the strategic consideration of abandoning the unilateral approach of the Trump era and returning to the multilateral approach to regain leadership in the global multilateral system.
The initiative is also designed to curtail the competitiveness of other countries as a way to preserve U.S. interests. According to the U.S. Treasury Department, the initiative is a policy initiative to promote the equitable distribution of global tax benefits and to combat tax havens. But its policy objectives may not be limited to this. Currently, the Biden administration has unveiled a $2.3 trillion plan to reengineer the nation’s infrastructure, which will bring the U.S. deficit in fiscal year 2021 to $3.4 trillion, accounting for up to 15 percent of GDP, the highest ratio in the developed world.
But how will the United States increase revenue? At the moment it seems it will do so mainly by raising the corporate income tax rate. Afraid that this move will damage the competitiveness of its own companies, the U.S. will also try to promote the return of U.S. private industry and capital. So the Biden administration hopes to maintain the absolute competitive position of the United States by reaching a multilateral consensus on a global minimum tax rate, so that other countries will have difficulty competing through low tax rates to gain a competitive advantage.
If we carefully analyze the details of the new U.S. tax law, we can see that the U.S. tax increase plan will not only raise the U.S. corporate income tax rate from 21 percent to 28 percent but will also include measures such as eliminating offshore investment incentives, reducing profit shifting and countering competition in the corporate tax.
According to U.S. Treasury projections, the tax increase plan will bring approximately $2 trillion in corporate profits back into the U.S. tax system over the next decade. Measures to remove the incentive for corporations to shift profits offshore will generate about $700 billion in federal tax revenue, making it clear that the United States puts “America's interests first.”
In the era of economic globalization, international cooperation is essential for addressing tax base erosion and profit shifting. Some multinational enterprises take advantage of international tax law differences and mismatches in the rules to shift profits to tax jurisdictions with lower or even zero tax rates, thus achieving tax reductions and tax avoidance. However, this has caused huge tax losses to countries. Moreover, some countries and territories that do not impose an income tax and do not tax residents’ foreign income have become global tax havens that encourage profit shifting by multinational taxpayers. Therefore, since the OECD’s international tax reform initiative — the Base Erosion and Profit Shifting Project — was launched at the G20 Summit in 2013, international tax cooperation has been used to combat tax erosion and profit shifting.
The main questions now are whether tax erosion and profit shifting should be tackled at all by setting a global minimum tax rate, and determining what level is reasonable for it. Such tax arrangements are extremely complex. For example, the current minimum tax rate proposed by the U.S. is higher than the rate under discussion by the OECD, which is close to 12.5 percent, exactly the current corporate tax rate in Ireland. And the current minimum tax rate of 21 percent in the United States is twice the original rate, which is bound to greatly increase the operating costs of some multinational companies and businesses, while also considerably undermining the competitiveness of some low-tax countries.
Tax rates are an important manifestation of an economy’s competitiveness. For highly competitive economies like Hong Kong (China) and Singapore, a large part of their competitive advantage comes from low tax rates and simple tax systems. These are also the core advantages that make them global offshore financial centers and hubs of international trade.
In 2018, about 32 percent of Hong Kong’s overseas investment position came from the British Virgin Islands, 8.1 percent from the Cayman Islands and 5.3 percent from Bermuda, which together accounted for nearly half of Hong Kong’s overseas investment.
Another data set shows that the average and median tax rates of 181 countries and territories having corporate taxes are 23.7 percent and 25 percent, respectively, and 145 of those have corporate tax rates higher than Hong Kong’s current corporate income tax rate of 16.5 percent.
Singapore has one of the lowest rates in the world, with a corporate income tax rate of 17 percent, and it has no capital gains tax. The Singapore government allows shareholders of Singaporean companies to enjoy tax exemptions on dividend income and many other tax incentives, making the country an attractive base for global investment.
Therefore, the agreement on the global minimum corporate tax rate will largely have a long-term impact on low-tax economies such as Hong Kong and Singapore. Ceding fiscal and tax sovereignty through tax harmonization is not in the fundamental interests of some countries and territories. Differences will continue to exist, as will game-playing. So the global minimum tax rate initiative will continue to be difficult to achieve.