When President Donald Trump signed the Tax Cuts and Jobs Act into law, a central tenet of that most significant tax reform in recent memory was the lowering of the United States’ corporate tax rate from 35% to 21%. That put the U.S. corporate tax rate – previously among the highest in the world – square in the middle of the pack among the 35 Organization for Economic Development and Cooperation (OECD) countries, wedged neatly between Italy and The Netherlands.
OECD Director of the Center for Tax Policy Pascal Saint- Amans in Lisbon in November 2019. (Photo by ... [+]
For years, many critics of the old corporate rate had argued that the U.S. was encouraging multinationals to shift their profits – and sometimes even their headquarters – to other countries with lower corporate tax rates, such as Luxembourg (24.9%), Ireland (12.5%), and Switzerland (8.5%), and in the process, losing out on valuable tax revenue. However, even supporters of the lower U.S. corporate tax rate worried that lowering it could cause a game of global one-upmanship, with other nations racing to the bottom to become the new tax haven du jour.
The OECD now seems to have a plan to stanch those fears once and for all.
Last month, the Paris-based organization introduced a new plan to introduce a global minimum level of corporate taxation for large multinationals, regardless of the corporate tax rate in the country where profits are recognized.
The proposal is the second part of sweeping change set forth by the OECD, who in October, introduced a unified framework aimed at reducing corporate tax avoidance and evasion. The proposals would see an increase in the rights of countries to levy tax on corporate income earned from sales in their jurisdictions, regardless of where those profits are actually recorded.
The proposals are a huge departure from the status quo, which currently allows many companies to limit their tax exposure on certain intangibles – like, for example, a digital service – in a country where they do not have a physical presence.
“A minimum tax rate on all income reduces the incentive for taxpayers to engage in profit shifting and establishes a floor for tax competition among jurisdictions,” the OECD said in a statement.
There’s certainly a case to be made for the OECD’s stance. Arguably, a minimum rate would eliminate the need for companies to seek tax havens, and as a result, would broaden a tax base for a number of jurisdictions. But for the tech companies at the center of all of this, the short-term impacts could be significant.
Not only is the OECD taking aim at profit shifting, U.S. companies are staring down the specter of another potential change in their own backyard. A handful of Presidential candidates, from Vermont Senator Bernie Sanders to South Bend, Indiana Mayor Pete Buttigieg – have their eyes set on rolling back the corporate rate to its previous level, while Massachusetts Senator Elizabeth Warren has a plan to make tax inversions virtually impossible. Meanwhile, the Trump administration said it plans to roll back Obama-era regulations that were enacted to prevent tax inversions.
Additionally, government authorities around the world have become much more transparent in sharing corporate tax information on a cross-border basis. In the UK, for example, the number of information requests related to tax offences committed by corporates or individuals sent to the UK from foreign prosecutors reached 148 in 2018, up from 103 in 2017. These requests to the UK Government require businesses or individuals to provide documents; such as transaction histories or bank statements, within a certain time period, or even give evidence in court.
The potential impacts of these initiatives go far beyond the incremental costs of the taxes themselves. The real challenge is accurately projecting and complying with this moving feast of a global tax code that keeps creating new wrinkles on a weekly basis.
Multinationals will have to invest heavily in compliance, while finding new ways to track these regulations in real time. As many have seen before, being at the center of an international tax controversy is not an enviable situation.
