Bruce Zagaris is a partner at the Washington, DC Law Firm of Berliner, Corcoran & Rowe and because of his expertise on international taxation controversies, we turned to him to explain to our readers the emerging issue of the global corporate minimum tax. This is a summary of our conversation which you can also access in its entirety by watching the video.
Andrea: Please briefly explain, what is the global corporate minimum tax?
Bruce: The latest development in the effort to change global corporate tax rules came in June, (2021) when US Treasury Secretary, Janet Yellen, then US President Biden joined with the Group of 7 (G7) leaders to propose an historical deal to redesign the world tax system. The proposal is that countries work together to ensure that a multinational corporation pays a minimum tax on its worldwide operations. So, if in a given country, a corporation did not pay this minimum tax – which looks as if it’s going to be 15% – then the other countries that have a relationship with that corporation would assess a makeup tax to ensure that the corporation pays that minimum 15% tax.
Andrea: You said that this is the latest effort to arrive at a global corporate minimum tax. What’s behind this effort?
Bruce: Several years ago, the Organisation for Economic Co-operation and Development (OECD) started an initiative called the Base Erosion & Profit Shifting (BEPS) initiative. The Goal of BEPS is to prevent multinational companies, many of which are high-tech companies in the United States, from eroding the tax base so that they pay little or no tax around the world. On average, they pay less than 5% tax on their profits. To accomplish this, they arrange their structure so that they are based in a low-tax country like Ireland or Bermuda. They then charge for things like research and marketing to the parent company in that low-tax jurisdiction. So, at the end of the day, on a profit of US $5 billion they may pay only 2% tax. The G7 countries are saying that this practice is wrong and that a more equitable tax system is needed so that all the countries in the world are getting at least a minimum tax revenue.
Andrea: You mentioned that the initial deal on the table was arrived at by the G7 countries, and that there are another 135 countries that could ultimately become a part of this agreement. Could you just pick up from there? What happens next?
Bruce:The next step is to present the proposal to the Group of 20 (G20) countries when they meet in Venice in July (2021). If endorsed at that session, the proposal goes before the 139 countries and jurisdictions that have participated in the OECD Inclusive Framework talks on the BEPS initiative. This is where the final details of this arrangement will be concluded. However, the process may encounter some difficulties with several small countries that participate in the Inclusive Framework. (NOTE: This interview took place before the G20 endorsement on July 10, 2021.)
Andrea: Which are these “small countries” and are they right to be concerned?
Bruce: They include several small Caribbean and non-Caribbean countries that have established international financial centers offering various tax incentives to attract investment. Even a number of EU countries are low tax jurisdictions, such as the Netherlands, Austria, Ireland, Luxembourg, Switzerland, Malta, and Cyprus. The small countries are included in the OECD Framework, which is however used to essentially impose its proposals on them. Furthermore, some of the large countries also have their financial centers (the City of London, several US states); however, they hold enough power so that these initiatives are not going to adversely impact them. For instance, the Caribbean has lost a lot of its market to Delaware, Nevada, South Dakota, and Wyoming. However, those states and the United States as a country never get penalized. The US controls the OECD and the Financial Action Task Force (a G7-led NGO founded to combat money laundering and other criminal financial activities); it is their biggest financial contributor, provides a lot of their officials, and exercises a disproportionate influence on the policies and the decisions of these organizations.
Andrea: Accusations levied at Caribbean and other small countries with international financial centers indicate concerns around corruption and lax regulations. Can you address that issue?
Bruce: The concerns are that these countries do not charge a high-enough tax rate and do not require the multinational investors to do enough substantial activities in their jurisdiction to deserve the tax incentive(s). Another complaint has been that the countries have not provided enough information exchange about their regimes to combat these concerns. However, it seems to me that by now the Caribbean has met the requirements for exchange tax information. Also, a lot of the smaller countries say it is their sovereign right to structure their tax system however they want to. Interestingly, this was also the position of the George W. Bush Administration, which in 2001 pushed back against the OECD efforts. Today, however, US Treasury Secretary Yellen and President Biden support a global corporate minimum tax.
Andrea: How much of this shift in the US position is driven by the need to finance its domestic agenda versus the sort of typical power play that’s just about we have the power so let’s beat up on these small countries?
Bruce: The idea of a global minimum tax was really started under the Trump Administration which had proposed a tax on intangible income. Now, the Biden Administration needs a lot of money because the US has sustained continuing large deficits and wants to pay for a multi-trillion-dollar infrastructure initiative, not to mention for the COVID-19 economic relief programs passed earlier. The Biden Administration is now seeking to make US corporations pay a minimum global tax on book profits and so supports this OECD initiative. However, it remains to be seen whether the Republicans are going to allow the US to implement the OECD initiative, let alone the Biden domestic proposal. So, the picture is very complicated politically, both internationally and domestically.
Andrea: Could we end up with a situation where the deal is accepted internationally but not able to be implemented by the US?
Bruce: An analogous situation exists with respect to the U.S. Foreign Account Tax Compliance Act (FATCA) which required all the banks around the world to search their accounts for any US taxpayers and report that information to the US government. Countries which did not cooperate would be penalized because the US would then impose a withholding tax. To get around countries’ laws on bank confidentiality, the US agreed to enter into agreements on exchanging information, also indicating that it would need time to amend its laws so that it could reciprocate. Eight years later, and it is the OECD Common Reporting Standard that is being used for the information exchange because the US has neither amended its laws nor reciprocated; nor has it joined the OECD Common Reporting Standard. This is a good example of where the US says, “Do as we say but not as we do. There’s one standard for us but we are going to hold you to a higher standard.”
Andrea: In other words, the proposal could be accepted but not enacted into US law, allowing the US to enforce a global minimum tax on US corporations but not require it to reciprocate with respect to corporations of other countries?
Bruce: Yes. Note also that the US corporate tax rate is currently 21%. So, the US could say it is reciprocating because its tax rate is even higher than the rate agreed to by the OECD process. This position obviously would be a double standard, not unusual for the US.
Andrea: How are you advising Caribbean or other small countries to approach this issue?
Bruce: I would put pressure on the US to live up to its commitment to reciprocate under the FATCA exchange of information agreement and also seek to get some benefits in exchange for the unilateral cooperation with the US by these small countries over these past eight years.
Click the video below to watch the interview: