Index > Briefing
Wednesday, April 07, 2021
The Impact of the U.S. Proposal on Global Minimum Tax Rate

In the recent American Jobs Plan, the Biden administration proposed to increase the corporate income tax rate from the current rate of 21% to 28% to make up for the new fiscal deficit caused by the increase in government investment and expenditure. This has aroused widespread concern among American businesses about future profitability. U.S. Treasury Secretary Janet Yellen stated that countries should work together to set a global minimum for corporate tax in order to end a three-decade long "race to the bottom". Judging from these new changes, the U.S. government is seeking to increase corporate taxation globally which could very well cause an impact on foreign investment under the backdrop of globalization.

It is not an uncommon phenomenon for the United States to change corporate tax rates domestically. During the Trump era, the Republican Party promoted tax cuts to reduce corporate income tax from the previous 35% to 21% in order to drive corporate development and economic growth. The Democratic Party of the United States has always emphasized an increase of taxes to help achieve social justice. This time however, Yellen proposed that it was necessary to restrict countries from a "race to the bottom", which was primarily to attract enterprises by lowering the tax rate on a global scale. The G20 meeting will also discuss the United States' initiative to establish a global minimum corporate tax rate. Although this can be regarded as one of the contents to be negotiated regarding global taxation issues, it will incorporate the fiscal and taxation policies independently determined by each country in the past into the global governance system. This is not only detrimental to multinational companies, but may also lead to changes in foreign investment strategies, thereby reorganizing the global investment landscape which was previously under globalization.

Yellen's proposal of this policy was not decided upon on a whim. Under the effects of globalization over the past few decades, cross-border trade and cross-border investments have promoted the development of the global economy while simultaneously making the different tax rates of various countries a way for multinational companies to avoid taxation. This has led to the prosperity of some tax havens and also benefited some countries with low tax rates. Furthermore, this has also caused some countries to adopt the strategy of a "tax rate race" in order to attract investment, leading to the phenomenon of a "race to the bottom". Based on data from the American think tank Tax Foundation, the global average corporate tax rate in 1980 was roughly 40%, and by 2020 it had dropped to about 23%. According to Gabriel Zuckerman, an economist at the University of California Berkeley, about 40% or over USD 700 billion of the profits made by global multinational companies in 2017 were hidden in tax havens. Meanwhile, Yellen's mentor and Nobel Prize winner Joseph Stiglitz is of the opinion that, this is akin to a tax version of the Paris climate agreement, where every country believes that it could "steal" the business of other countries through tax cuts, and the only beneficiaries of this "race to the bottom" are the wealthiest multinational companies. Therefore, Yellen's proposal has its theoretical and practical background.

Since the 2008 financial crisis, countries have started negotiations on tariff issues under the framework of the G20 and the Organization for Economic Co-operation and Development (OECD) and have tried to reach a global framework that benefits all countries on issues such as digital taxes and minimum corporate tax rates under the new normal. An OECD study last year found that reform measures to reduce corporate tax avoidance could bring about USD 100 billion in benefits to countries each year. However, the situation that each country faces varies, and the Trump administration has always held a boycotting attitude towards relevant negotiations, making the progress of the said negotiations slower. At the same time, since 2008, 24 of the 37 OECD member countries have reduced their corporate tax rates, while only seven countries have raised the rates. It is obvious that competition among countries has become more serious. The tax reduction policy of the Trump administration in the United States has also significantly reduced the U.S. corporate income tax from 35% to 21%. Yellen's proposal means a change in the U.S. government's policy, from the "America First" position of the past to an active participation in international governance, with the hopes of establishing a new system of rules that is conducive to the United States. At the same time, such new rules could also be used to restrict other countries.

However, the most realistic impact of Yellen's proposal is that it will prevent the outflow of American companies and to encourage companies to increase investment in the United States. Biden's American Jobs Plan aims to increase the current federal corporate income tax rate from 21% to 28%, and to raise the minimum tax rate for overseas profits of U.S. companies from 10.5% to 21% in order to restrict tax avoidance of U.S. companies simply by abusing tax havens and instead encourage them to expand investment in the United States. If the goal of setting a global minimum corporate tax rate is achieved while simultaneously increasing the global tax rate, this can offset some of the negative effects of the U.S. tax increase, which is conducive to the "returning" of the U.S. companies.

Germany and France as well as several other countries have welcomed Yellen's proposal, while some low-tax countries still have reservations regarding it. Irish Minister of Finance Paschal Donohoe said that establishing a global minimum tax rate may affect smaller economies such as Ireland, which have chosen a low-tax model in order to attract international investment. Many analysts believe that under the G20 or OECD framework, it may still be difficult to reach an agreement in the short term. If the United States can reach an agreement within the G7, it may affect other countries and regions, and form a new foreign investment pattern which will be dominated by more developed countries.

In response to this situation, Bloomberg columnist David Fickling pointed out that Yellen's proposal has an impact comparable even to Trump's trade war. It not only affects the pattern of foreign investment, but also further affects the independence of fiscal and taxation policies as well as the systems of various countries that were previously considered to be characteristics of sovereignty, as the United States is likely to use its own position or G7 standards to force other countries to comply with relevant investment and tax rules. If the United States imposes sanctions on tax havens or low-tax countries like Trump's trade war, this will undoubtedly open up a new battlefield of "anti-globalization".

Final analysis conclusion:

If tariff rise imposed by Donald Trump in the trade war can be deemed as the beginning of "anti-globalization," the Biden administration's proposal for the minimum global tax rate could very well promote such "anti-globalization" to further affect corporate investment and development. These changes mean that the global trade and investment order under the WTO framework in the past will further collapse and disintegrate.

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