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Coming together over a global corporate tax rate

How does the Biden plan to change how global companies are taxed align with Canada’s interests?

Man holding up the tax rate

Elections have consequences. So do pandemics. Those truisms of 21st-century politics could be driving a fundamental shift in the relationship between corporations and states worldwide.

Or maybe not. On April 5, U.S. Treasury Secretary Janet Yellen pitched the idea of a global minimum corporate tax rate in a speech to the Chicago Council on Global Affairs. Such a measure, she said, would permit the post-COVID recovery to proceed on a “more level playing field” and would help end a “30-year race to the bottom” in corporate taxation.

It’s not hard to see where this is coming from. Yellen’s boss, President Joe Biden, is pursuing an ambitious domestic agenda that includes a $2 trillion infrastructure plan. Some of what he has planned is being deficit-financed, but much of it depends on tax rises for corporations and the very wealthy — on getting them to “just pay their fair share,” as Biden told a joint session of Congress last month.

The crippling cost of the pandemic is driving an insatiable hunger for revenue in capitals around the world. Governments frustrated by the tax strategies employed by digital giants — mostly based in the U.S. — have been pursuing digital services taxes of their own. Canada’s DST takes effect next year and is projected to raise $3.4 billion over five years.

The administration of former U.S. president Donald Trump hated DSTs and threatened to slap tariffs on countries that introduce them. It also moved to impose a minimum tax on the income earned by foreign affiliates of U.S. companies from “intangible” assets — patents, trademarks, the things that power the knowledge economy — known as “global intangible low-taxed income,” or GILTI. The idea was to remove the incentive to shift profits from the U.S. to low-tax jurisdictions abroad.

Now, the Biden administration wants to go further by raising the U.S. corporate rate from 21% to 28%, and the rate on American firms abroad from 10.5% to at least 21%. If Washington can get most of the major economies to go along with a global minimum rate close to its own overseas rate, it could undermine the key political argument against corporate tax increases — that they send investors scrambling toward the nearest low-tax jurisdictions.

“The GILTI rule really didn’t work to align U.S. tax rules with the rest of the world and seems to have affected U.S. competitiveness,” said Robert Korne, a taxation lawyer at Spiegel Sohmer in Montreal. “Plus, excluding the recent high-tax kickout regulation, in many cases it was not bringing in a lot of revenue once foreign tax credits were taken into account.

“If the U.S. is the only country now increasing its corporate tax rate, it creates more of a financial disadvantage for U.S.-based multinationals.

“That’s why the Biden administration needs the world onside with a minimum rate. And that’s where the question of which countries get to tax what and where comes in.”

The OECD-brokered negotiations on global corporate taxation are structured around two policy “pillars” — a global minimum rate and a global carving-up of taxation rights on revenue earned by corporations in jurisdictions where they lack a physical presence (which, for digital behemoths like Facebook, is pretty much everywhere).

It’s safe to say the U.S. is a lot more enthusiastic about the first pillar than the second — and the tariff threat against nations introducing DSTs isn’t quite off the table. But without getting the Americans to agree to share the wealth generated by American companies abroad, it’s hard to see an international consensus forming on a meaningful global minimum rate.

“It’s easy to draw an analogy to how the Euro works,” said Patrick Marley, a partner at Osler in tax law. “A common currency doesn’t mean countries want the same things from it. Some EU countries benefit when the Euro trades at a higher value, some do better when it trades lower.

“Tax policy is similar — there are winners and losers. If every country has the exact same corporate tax rate, the United States is the big winner because of its market size and natural corporate synergies.”

So even though Finance Minister Chrystia Freeland has spoken in glowing terms about the concept of a global minimum rate, it’s worth asking whether Canada would be willing to abandon its DST without getting something big in return through a global accord on taxation rights.

“It’s hard to tell what Canada’s interest is in this, apart from consensus for consensus’ sake,” said Marley. “It’s not at all clear that this would be good for us.”

Tension over taxation rights, coupled with the desire of low-tax jurisdictions like Ireland to maintain their competitive advantage, makes the prospect of a global rate close to 21% seem like a long shot.

“If you could get an agreement on a global minimum of, say, 12%, that’s not going to have much of an impact — maybe only a few low- and no-tax jurisdictions would be affected,” said Korne. “But to get an agreement a more meaningful rate, other countries are going to want a piece.

“In other words, everyone has to come together. The various DSTs just make that more complicated. But if you just give the U.S. everything it wants, it’s not going to be at the table when the time comes to talk about what you want.”