Global Tax Rate?

Dear Rich Lifer,

Last weekend, Finance Ministers from the Group of Seven (G7) — Canada, France, Germany, Italy, Japan, the U.K. and the U.S. — agreed to back a U.S. proposal that calls for corporations around the world to pay at least a 15% tax on earnings, regardless of where their headquarters is located.

This agreement has been years in the making. Treasury Secretary Janet Yellen celebrated the win and said it would help end a 30-year “race to the bottom in corporate taxation and ensure fairness for the middle class and working people in the U.S. and around the world.”

The goal of the minimum tax rate is to stop multinational companies from taking advantage of tax havens and force them to pay more of their income to governments.

Officials have described this agreement as a much needed step in reshaping global commerce and solidifying public finances. 

Today we look at what it actually means and the coming battle to put the agreement into effect.

The Agreement 

There are two main pillars of the agreement. The first sets a global minimum tax rate of 15%, which would apply to overseas profits. As we mentioned, this is intended to discourage multinational companies from shifting profits and tax revenues to low-tax countries. 

The second pillar will allow countries to tax some of the profits made by big companies based on the revenue generated in that country, rather than where the company is located for tax purposes. 

The agreement will also give countries the ability to tax the profits of digital companies like Apple Inc. and Facebook Inc., which both dominate global markets but pay very little in taxes in the countries they operate out of. This rule will apply to companies that have a profit margin of at least 10% and would give countries the right to tax 20% of profits above that threshold. 

Governments will still be able to set whatever local tax rates they want, but if a company pays a lower tax rate in another country, their home government could “top-up” their taxes to the new minimum rate of 15%.

American Companies Respond

Nick Clegg, vice president of global affairs at Facebook, applauded the agreement stating, “We want the international tax reform process to succeed and recognize this could mean Facebook paying more tax, and in different places.”

Google spokesman Jose Castaneda, commented, “we hope countries continue to work together to ensure a balanced and durable agreement will be finalized soon.”

Matthew Schruers, president of the Computer & Communications Industry Association, which represents companies including Alphabet Inc.’s Google and Facebook Inc., also had a positive response to the agreement. 

However, he expressed concern about a separate set of levies on digital businesses that multiple European countries announced, stating, “The work is not finished until the digital taxes that unfairly target U.S. businesses have been removed.”

The G7 did not agree on a schedule to remove these levies, leading many to believe it’s a sign that there is uncertainty over when the new tax agreement will become actual law. 

Tech companies have continued to state that they prefer an international resolution on taxes, like the agreement at hand, rather than a patchwork of international levies. 

This may be because many big tech companies, including Apple Inc. and Facebook Inc. have been already reporting recent effective tax rates roughly around the 15% minimum rate.

Apple Inc. reported an effective global tax rate of 14.4% for the year ended Sept. 26, 2020, so the tax rate increase would be slim. 

The Challenges Ahead

There will be numerous challenges turning the agreement into law in many different countries. 

Monika Loving, national practice leader for international tax services at advisory firm BDO, reports, “While we may see a deal, it’s then potentially 18 months or more to push it into the domestic law of each of the countries. In terms of revenue impact, we’re maybe two years off seeing tax administrations collecting any additional revenue.” 

According to tax specialists and officials, the U.S. Congress, in particular, will become a focal point for the world to watch how it will or will not implement the new tax rate. 

In other countries with parliamentary systems, governments are able to turn pledges into local laws more quickly. However, in the U.S., challenges are anticipated due to the slim Democratic majority in the House and the split Senate. 

This puts all the counties in the agreement into a tricky spot. For the U.S., lawmakers may be worried about leading the charge on enacting the law without the assurance of a complete global accord. For example, if the U.S. raises taxes, but other countries fail to do so, it will make America a less desirable place to have a company’s headquarters. 

For the other nations, there is a reluctance to change their own laws or remove taxes without the U.S. acting first. The countries that move ahead first with the changes risk damaging their revenue bases and companies. 

Republicans, in particular, are critical of the European levies on digital businesses and worry about supporting an international tax agreement without assurances that these levies will be lifted. 

Next Steps for the Agreement 

Finance ministers for the Group of 20 (G20) are set to meet in Venice in early July, and this agreement will be on the agenda for discussion. The G20 includes all the members of the G7 plus some larger developing countries, including India, Brazil, and China. 

A broader group of 135 countries called the Inclusive Framework will also need to get on board with the global minimum tax rate. This will be even trickier to accomplish as some countries, like Ireland, have a tax rate lower than 15% and will not be eager to raise their rates. 

Despite the uphill battle, many officials remain hopeful, including France’s finance minister, Bruno Le Maire, who commented, “Let’s face it, it’s going to be a tough fight. I am optimistic that we will win it because the G-7 is giving us extremely powerful political momentum.”

We will have to wait and see how talks go both internationally and at home in Congress to determine the future of international tax law.

To a richer life,

The Rich Life Roadmap Team 

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