Dick Roche wrote that with regard to global tax reform, the key question is whether US President Joe Biden can persuade Congress to support the changes required to implement a global plan to tax multinational companies more fairly.
Dick Roche is a former Fianna Fáil politician. In 2008 and 2009, when Ireland held two referendums on the Lisbon Treaty, he served as Minister of State for European Affairs.
When the OECD launched its tax initiative for base erosion and profit shifting (BEPS), the Obama administration supported the project’s goals but was cautious. The chief US negotiator commented that in the BEPS process, every other country wants the US to “pay for lunch.”
The Trump administration was less enthusiastic, refused to sign the BEPS multilateral convention in 2016, and reacted negatively to the March 2018 report “Tax Challenges Brought by Digitalization”. However, President Trump did take action on the domestic front, introducing the 2017 Tax Cuts and Jobs Act, which changed the tax landscape of US multinational corporations and made it easier for the United States to participate in the BEPS process.
In January of this year, the incoming Treasury Secretary Janet Yellen told the senator that she looked forward to “active cooperation with other countries through OECD negotiations”, which heralded a major shift in the US position. The French Finance Minister praised the change in American policy for opening the way for a “new international tax system.”
With the entry of the United States, discussions on the BEP process have accelerated dramatically. In June, the G7 finance ministers, G7 leaders and G20 finance ministers approved reform proposals. On July 1, the OECD announced that 131 of the 139 countries and regions participating in the framework discussions had joined these proposals. It is expected that these proposals will be finally signed at the G20 Rome summit in October.
The reform plan contains two “pillars.”The first pillar allocates specific taxation rights to multinational companies [MNEs] The global turnover exceeds 20 billion euros, and the profitability from the home country to the markets where it conducts business and makes profits exceeds 10%. The second pillar stipulates a minimum corporate income tax rate of at least 15%.
The progress made in June caused considerable hype. The minimum tax rate arrangement is the main headline news.
President Biden argued that the minimum effective interest rate would “prevent race-to-bottom competition among countries that are attracting corporate investment at the expense of priorities such as protecting workers and investing in infrastructure.” Treasury Secretary Yellen called the agreement. It is historic and urges all countries to join.
Cynics may question whether allowing countries with current corporate tax rates above 15% to sign a tax base lower than their tax rate can really be labeled “historic.”
There are more important points. The 10% lower limit of profit in the first pillar raises questions. Unless adjusted, the arrangement will exclude Amazon, which has a market value of $1.6 trillion and has a tax avoidance record, which is not a big selling point.
The exemption in the first pillar has caused concern. The exclusion of mining and extractive industries that have a significant impact on the environment has attracted attention: similarly, an agreement to exclude financial activities in the City of London. Other spin-offs that may cause controversy may also occur.
There are more fundamental problems. What taxation and how much taxation is the core of national sovereignty. Shifting the responsibility for setting tax regulations and tax rates from national politicians who make public policies and subject to electoral discipline to unelected tax managers who operate behind closed doors in the OECD raises issues that should not be ignored. The slogan of the American Revolutionary War “Taxation without representation is tyranny” still applies.
With the emergence of the G7 consensus in June, perhaps the most concise public comment on the process came from Senator John LeFondre, First Minister of Jersey, who questioned the leadership role played by the United States.
With President Biden in his sight, Senator Le Fond suggested that “some people need to look at their hometown before they can participate in other people’s tax policies” and added that “maybe the United States should look at Delaware first. And then tell the rest of the world (what) to do it.” Delaware is often referred to as a “domestic tax haven in the United States”. It has more registered corporate entities than voters. Joe Biden has been there for decades. The U.S. Senate serves as a representative.
Although Senator Le Fondré’s anger did not lead Jersey to adhere to the OECD’s BEPS, he emphasized the inconsistency and vulnerability of surrendering any leadership role in tax reform to the United States.
In the past 70 years, U.S. legislators have constructed a tax system that includes tax avoidance. For decades, the U.S. tax system has encouraged U.S. companies to delay payment of U.S. taxes by keeping profits overseas. It is estimated that as of 2018, US multinational corporations hold more than US$2 trillion in assets overseas and are the main contributor to the global problems that the BEPS project aims to solve.
U.S. legislators turned a blind eye to how U.S. multinational corporations treat foreign profits, believing that these arrangements provide domestic companies with a competitive advantage, and in the long run, by reducing the amount of foreign tax credits that the authorities must provide, they can obtain more tax revenue for the country When finally repatriating to China.
More important than what happened in the past is what will happen next.
The key question is whether President Biden can persuade Congress to support the changes required to implement the BEPS package. Without the involvement of the United States, this process would collapse.
Opponents of Congress argued from the beginning that the OECD reforms have weakened the competitiveness of the United States, will encourage “companies to move high-paying jobs out of the United States” and make American companies “take greater tax liabilities abroad.” “. President Obama was strongly reminded that “Only Congress has the ultimate power to amend the U.S. tax law.”
After the G7 meeting in June, the Republican leaders of the Finance Committee of both houses of Congress sent a letter to Secretary of the Treasury Yellen expressing special concerns about the first pillar arrangement. The top Republican of the House Ways and Means Committee’s main tax planning committee called the results of the G7 “dangerous economic surrender,” “deprived of our American tax base” and “favored foreign companies and workers rather than American companies.”
As the United States will hold key mid-term elections in 2022 and the political atmosphere in Washington is getting worse, opposition to the reform plan will intensify. It is difficult to win the support of Congress. If the final form of the multilateral instrument that makes the agreement effective is equivalent to an international treaty, then the 67 votes required for ratification in the U.S. Senate will require a miracle.
Implementation is often the Achilles heel of reform strategies. The intense partisanship in Washington is likely to become the Achilles heel of the OECD initiative.
