I would like to separate the facts from the fiction on global corporate taxes. The Biden administration is trying to apply its theory of globalization to corporate taxes. Under the Trump administration, legislation was passed to drop the U.S. federal corporate tax rate from 35 percent, among the highest in the world, to 21 percent to spur growth in the U.S. economy. The Biden administration and others in the U.S. would like to raise the federal corporate tax rate from 21 percent, but they fear that the disparity between a higher federal corporate tax rate and lower tax rates in other countries will have U.S. companies moving their domiciles, which determines their jurisdiction for taxation, to more friendly countries in a process called “tax inversion.” Tax inversions were popular during the years of the Obama administration, but with the federal corporate tax rate dropping to 21 percent, the tax advantage with respect to other countries diminished and the process became less useful.
To support its desire to increase the federal corporate tax rate, the Biden administration wants to lessen the gap between its proposed corporate tax rates and the lowest rates in other countries through a global minimum tax of 15 percent on global profits no matter where corporations establish their headquarters. This position overlooks the simple fact that, even with some of the proposed safeguards designed to punish countries acting as tax havens, it would take only one or more countries objecting to the minimum tax rate of 15 percent and maintaining their lower rates — which creates revenue and is advantageous for these countries — to undermine the proposal. In addition, raising the federal corporate tax rate would hurt U.S. corporations at a time when we seem to be entering a softening economy.
In October 2021, more than 130 countries agreed to a two-part plan to impose a tax on the profits of large corporations, to be finalized in mid-2022, with the hope of implementing the changes next year. The timeline for finalizing the rules has now been extended to 2023. The first part of the plan is the global minimum tax. To date, there has been little progress in passing national laws to implement the global minimum tax. In the U.S., the implementation of the global minimum tax legislation has been stalled in Congress for months. Meanwhile, the European Union has not been able to pass legislation to approve the tax; France, Germany, the Netherlands, Italy, and Spain have agreed to press ahead with the tax on their own as soon as next year.
The second part of the plan would allow countries to impose their corporate taxes on corporations based on where those entities’ goods and services are sold, in part aimed at resolving disputes around unilateral digital-services taxes directed toward U.S. technology companies. The Biden administration argues that the lost tax revenue on our technology giants and other large corporations would be made up by taxes collected from large foreign-based companies selling to U.S. consumers and other corporations that book their profits from U.S. sales in foreign jurisdictions. The administration asserts that the deal is roughly revenue-neutral for the U.S. Even if that assertion is true, why would the U.S. want a revenue-neutral tax deal? The U.S., with its large tech companies and other corporations, has an advantage over Europe, and this plan squanders that advantage. If other nations are going to unfairly pick on U.S. corporations with unilateral digital-services taxes, then we should defend our advantageous position through actions such as tariffs, military support, energy, loan-policy reviews, and aid reduction, rather than accept the tax plan. This agreement would make the U.S. less competitive and cede taxing of U.S. multinational corporations to foreign countries.
While some major U.S. technology companies have largely backed the proposed tax changes to avoid the digital tax maze in Europe, a better response would be to defend our U.S. companies so that they do not have to acquiesce.
Some argue that if the U.S. does not adopt the 15 percent global minimum tax, our companies with foreign subsidiaries will essentially be paying a penalty tax to foreign countries. I would respond to that argument that we should defend our advantageous position by utilizing the mechanisms I outlined earlier.
Fortunately, congressional approval of this tax plan is required, and so far the plan has met with resistance. In addition, any tax treaty will require a two-thirds vote of the Senate. If finalization of the tax plan goes into 2023 as projected, I expect it will be met with even greater resistance if Republicans take control of Congress.
Perry V. Kalajian W79 GL90 WG90 is an attorney, consultant, business and legal analyst, and national television personality.