Global Tax Heads to Congress
Dear Rich Lifer,
An international corporate tax agreement has been decades in the making, and now, the eyes of the world are on the U.S. as the deal heads to Congress.
Over the weekend, the Group of 20 major economies (G20) backed the plan at a summit in Venice, Italy.
The plan aims to curb corporate tax avoidance and renew international tax rules. Plus it provides President Joe Biden a much-needed opportunity to follow through on a promise to his base — raising the corporate tax rate.
Now, a standoff is brewing in Congress.
Lawmakers are watching how fast other countries are moving to implement the new plan…
While the rest of the world watches the U.S.
Can Congress agree to implement a minimum corporate tax of at least 15% and embrace new rules for dividing the power to tax the largest companies?
Today, we will break down the details of this new latest foray into international governance…
What International Taxation Looks Like Now
Before we dive into the changes this agreement will make, we wanted to look at current international taxation and the problems it has caused.
Right now, corporate profits are taxed where value is created, meaning they can be taxed based on a company’s headquarters, a factory associated with the company, or even where a patent was filed.
Additionally, the U.S. and a few other countries impose minimum taxes on companies based on their soil. So if a U.S. company doesn’t pay enough profits abroad, it owes money to the U.S.
This way of operating has become problematic because, in an increasingly digital economy, profits are more mobile and aren’t always located where companies have the most employees or customers.
Many companies are taking advantage of these rules and using various loopholes, such as moving intellectual property (IP), to put their profits into the lowest tax jurisdictions.
This has raised issues for countries like the U.K. and France, which have seen U.S. tech companies profit from serving their citizens without paying substantial income taxes. As a result, such countries have imposed digital services taxes aimed at getting revenue from U.S. tech companies.
Over the last few decades, countries around the world have lowered tax rates. The U.S. had refused to do so, leaving the rate at 35%, until Donald Trump became president and his Republican-controlled Congress changed the U.S. tax rate to 21% and lightened U.S. taxes on foreign income.
Now, the Biden Administration is arguing these trends are encouraging a “race to the bottom,” where countries are only focused on competing to offer the lowest rates as incentive to move taxable profits and “real” business activity out of higher-taxed countries.
After years of dealing with these issues, international negotiators have split their agreement into two parts: Pillar One and Pillar Two.
Pillar One was pushed by European countries, including the U.K., and is an attempt to rewrite rules about which countries are allowed to tax a company’s profits by giving some taxing rights to nations where the customers are.
This Pillar is clearly focused on dealing with the Big Tech companies, which have been a source of tension, as we mentioned above.
The agreement for Pillar One would apply to countries with revenue over 20 billion euros, or about $24 billion, and profit margins over 10%. If a company meets these two requirements, the market country (aka the country where customers are located) is allowed to tax between 20% and 30% of the profits above that level.
The agreement also says that the revenue and profitability thresholds could also apply to a portion of a company, if the segment is financially reported. For example, Amazon Web Service, its cloud division, would be subject to the tax even though Amazon as a whole doesn’t qualify for the tax.
This pillar would affect about 100 companies, including many of the tech companies targeted by the digital service tax.
Because of this, the U.S. wants assurances that countries will repeal their digital service taxes in a timely fashion.
Pillar Two is mainly driven by the U.S. and focuses on the global minimum tax rate that Treasury Secretary Janet Yellen has been championing.
This pillar would impose a minimum 15% tax rate on companies’ worldwide earnings. This means that if a company is multinational, it will be forced to impose a minimum 15% tax in each country it operates out of.
The goal is to make it more difficult for companies to lower their tax bills by placing profits, operations or headquarters in low-tax jurisdictions. The idea is that if it’s harder to avoid high-tax countries, countries will be able to generate more revenue from big corporations.
This will be crucial to the Biden administration’s corporate tax plan, which calls for a 28% domestic tax rate and a 21% minimum tax rate on U.S. companies’ foreign earnings.
The U.S. has stated that if other countries fail to impose the minimum tax, it will impose a tax called The Shield, under which, foreign-based companies would lose U.S. tax deductions when they send money into global structures that use low-tax jurisdictions.
There still exists some disagreement over the base 15% rate. Some countries want the rate to be higher than 15%, others, like Ireland, want the rate to be lower.
Now that we have a clear understanding of both parts of the agreement, we are ready to dive into the challenges the U.S. will face passing the plan into law and explore what it could mean for U.S. companies.
Tune in tomorrow; you won’t want to miss out on this information…
To a Richer Life,
The Rich Life Roadmap Team