The „Made in America Tax Plan“ of the new US government has strong implications for international tax negotiations at the OECD. Although no political decisions are to be expected before mid-2021, the US proposal could significantly boost ongoing negotiations. Not only to make an agreement that curbs profit shifting and tax competition more likely, but also to make it more effective.
The OECD tax plan
The OECD’s plan to reform international corporate taxation rests on two Pillars.
Pillar 1 shall bring a reallocation of taxing rights to market economies for large multinationals with tech or consumer facing businesses. It follows on a long-standing discussion about the tax challenges arising from digitalisation and aims to prevent a patchwork of national digital services taxes and the associated trade tensions. Unions and NGOs have been critical about Pillar 1 because of its low ambition and high complexity.
Pillar 2 introduces a minimum tax rate for global profits of multinationals headquartered in participating countries. While the technicalities are largely set, the size of the minimum tax rate remains an open political question. Discussions have been going in the direction of 12.5%, which is far below the 20-25% corporate tax rate that is typically paid across countries.
Negotiations at the G20 and the OECD’s Inclusive Framework came to a halt because the US and its tech giants felt threatened by Pillar 1 and demanded a “safe harbour”-clause (that would have made the new rules voluntary for multinationals), which was rejected by all other states. The G20 then decided to postpone political decisions to mid-2021.
Biden’s “Made in America Tax Plan”
The main goal of the „Made in America Tax Plan“ is to raise more taxes from US corporations to finance post-Covid-19 recovery. To shield these efforts against corporate tax avoidance, the plan also involves bold proposals to end tax dodging and competition on a global scale.
The first element of that strategy is to strengthen the existing minimum tax on „Global Intangible Low-Taxed Income“ (GILTI) of US multinationals, the domestic equivalent to Pillar 2. Biden’s main goal here is to double the GILTI tax rate to 21%, calculate it on a per-country basis (like in OECD Pillar 2) and skip the 10% carve-out based on tangible assets.
The second element of the strategy is to encourage other countries to adopt robust minimum taxes as well. This, above all,involves ending the deadlock on Pillar 1, thereby allowing an agreement on the global minimum tax in Pillar 2. To that end, according to a leaked presentation of the US financial ministry, the US wants to drastically simplify Pillar 1 by reducing the number of corporations in scope and focus only on the 100 largest and most profitable multinationals irrespective of their sector. What does not sound like much might in fact be significant as the US wants to reduce complexity “without materially reducing quantum of profit available for reallocation”. That is to saythat the US proposal could very well mean that a true unitary taxation of the world’s biggest corporations is within reach. However, it should be kept in mind that by ratifying a Pillar 1 agreement, countries would at the same time commit to withdrawing their digital services taxes. Without sufficient revenue prospects for countries, an agreement could therefore get tricky.
AK’s assessment: US tax plans big step in the right direction
Although it is too early to assess whether the US proposals are a final breakthrough in international tax negotiations, the echo of several stakeholders suggests that they could significantly boost on-going negotiations. Moreover, the proposals are also to be welcomed from a policy perspective, as they involve a lot of what AK has been saying for years. Starting with the fundamental point that globalisation without tax dodging and tax competition is not only possible, but desirable. Concerning OECD tax plans, AK took a nuanced position that was critical towards Pillar 1 and focussed on the highest possible minimum tax rate for Pillar 2. The US proposal is an enormous step in this direction. We’ve always argued that the main aim for progressives is to push for the best possible outcome on OECD tax plans. However, such an agreement should not be considered as the end of the fight for fair business tax rules- only as the beginning.