By Robert Stewart
Because of a global “race to the bottom”—where multinational companies use accounting maneuvers to book their profits in low- or no-tax jurisdictions, or “tax havens,”—since the mid-1980s, the average tax rate paid by corporations has dropped from 49% to less than 23%. By law, in the U.S. corporations are not even required to pay that—their taxes were slashed by Republicans more than three years ago and now the domestic corporate rate is just 21%. The result has been stark. According to a report from ITEP, “91 of the most profitable corporations in the United States paid effective tax rates of zero or less on their 2018 U.S. income.”
While egregious tax avoidance strategies by multinational corporations have been going on for years, they were intensified thanks to provisions from the 2017 tax giveaway bill, the Tax Cuts and Jobs Act (TCJA). Under TCJA, multinational companies’ offshore earnings are at most taxed at half the rate of domestic-booked earnings (10.5%), with another loophole allowing many companies to actually pay nothing in U.S. taxes on foreign-booked profits.
Tax avoidance by companies aggressively using profit shifting is not unique to the U.S., but the advent of globalization and online sales has sharpened many countries’ interest in comprehensive tax fairness solutions. Many online multinational corporations like U.S. based big tech companies Google, Amazon, and Facebook generate large profits that can be attributed to sales in regions like Europe, yet these companies are not paying taxes in those same countries. European nations like France are advocating that they should collect digital services taxes. And there is a need to ensure all companies are paying at least some tax rather than using profit shifting to exploit tax jurisdictions.
Therefore, for several years, the OECD (Organization for Economic Co-operation and Development), which is a global economic standard setter, has done significant work to address tax avoidance of multinational entities. The OECD’s As the next step in its BEPS process, the OECD has rolled out two pillars to address pressing tax issues that countries face: 1) taxing the digital economy; 2) setting a global minimum tax. And, as the world grapples with a global pandemic and economic collapse, countries are scrambling to find additional sources of revenue. Though not initially considered in early global negotiations, the pandemic has further incentivized OECD participating countries to ensure the process is completed in a timely way.
Under the OECD’s plan, Pillar 1 would adopt an international digital tax regime in which multinational corporations will be taxed in each country where they do business.
Pillar 2 seeks to set a global minimum corporate tax rate. This global solution is the only way to fully remedy the use of tax havens by multinational corporations since it would ensure that all large internationally operating businesses pay at least a minimum level of tax.
However, some countries want to see progress happen more quickly than the OECD plan France is one of the first countries to lead in the space of implementing a digital tax. Initially in retaliation to France levying their digital tax, the United States Trade Representative (USTR) announced the intent to impose a tariff on France for “$1.3 billion worth of French handbags, cosmetics and soaps.” However, USTR has since walked back those threats and has suspended the proposed French tariffs.
OECD Timeline for Public Consultation On Its Two Pillars
On October 12, 2020, The OECD held a public briefing to discuss the two pillars’ blueprints for taxation. In an effort toward transparency, OECD sought commentary from stakeholders around the world. The FACT Coalition (Financial Accountability & Corporate Transparency), of which Public Citizen is a Steering Committee member, submitted a comment on December 16, 2020 calling on the OECD’s rules to be as robust as possible.
The FACT coalition’s input to the OECD centered around Pillar 2 and the need to be even bolder regarding setting a global minimum tax. Currently, Pillar 2’s suggested global minimum corporate tax rate is 12.5%, while the FACT Coalition urging it take up a rate of closer to 25%. FACT also pushed for stronger rules to prevent inversions (when companies relocate to a foreign country to reduce their corporate income tax liability), ensuring that global minimum tax standards apply to all corporations regardless of income level, and similar suggestions to strengthen the minimum tax proposal.
Additionally, public consultation meetings on the Two Pillars will be held in mid-January 2021.On January 27-28, 2021, the OECD will host its annual conference virtually to discuss tax and economic issues it is working on, including updates on the Two Pillars. The OECD’s new goal is to reach agreement on the global minimum tax by April 2021, and for the digital tax by the middle of 2021. It is a great sign that countries are showing this ongoing commitment to work in concert to bring tax fairness to fruition.
Additionally, the era of the new Biden administration presents a prime opportunity for the U.S. to become a true leader in the collective efforts to find global solutions to global economic issues. During her Senate Treasury Secretary confirmation hearing, Janet Yellen stated that “We look forward to actively working with other countries through the [Organization for Economic Cooperation and Development] negotiations on taxes on multinational corporations to try to stop what has been a destructive, global race to the bottom on corporate taxation.” This collaborative approach will be a glaring contrast to the retaliatory approach of the previous administration.
Public Citizen and our coalition partners will continue to urge the Biden administration to keep its campaign promise to raise revenue, curb tax havens, and protect American jobs—not just through the OECD’s efforts but to holistically take on the challenge to unrig our tax code and reinvest in our communities. We hope that you join the tax fairness fight!