Assessing The Real Cost Of A Corporate Minimum Tax

U.S. Treasury Secretary Janet Yellen has introduced a new salvo in the decades long battle to stop multinational corporations from profit shifting. Under her plan, all G20 nations would agree to a global minimum corporate tax rate of 21%. In theory, that would remove the incentive for large corporations to claim income in countries with low corporate tax rates like Ireland, which currently has a 12.5% headline corporate tax rate or Switzerland, which has an 8.5% corporate tax.

Supporters of the plan say it will create a level playing field and protect vital tax revenue. Critics warn it will harm smaller economies and encourage outlier countries who are not part of the agreement – namely, China and Russia – to wield lower corporate tax rates as a weapon in global trade. In reality, the real cost of the global minimum corporate tax will be increased tax complexity and heightened scrutiny for the large corporations caught in the middle of the debate.

We’ve been down this road before. Yellen’s proposal reads a lot like the one the Organisation for Economic Development and Cooperation (OECD) introduced in November of 2019. That proposal was the second part of sweeping change set forth by the OECD, which introduced a unified framework aimed at reducing corporate tax avoidance and evasion. The proposals would see a minimum tax rate applied to all corporate income in every member jurisdiction. There would also be an increase in the rights of countries to levy tax on corporate income earned from sales in their jurisdictions, regardless of where those profits were recorded.

At the time, I asked if the OECD just killed profit shifting. As it turned out, it didn’t. But what the OECD plan did do is embolden individual member states to start creating their own taxes on digital services and put a critical spotlight on the corporate tax practices of multinational corporations. In the months that followed, we saw France introduce a 3% digital tax on all sales of big technology companies like Google and Amazon. In announcing the tax, French Finance Minister Bruno Le Maire said France would abolish this digital tax if OECD countries all enacted a global minimum level of corporate taxation for large multinationals. 

Even the Trump administration’s sweeping reduction of U.S. corporate tax rates contained a kicker aimed at capturing foreign income. The Tax Cuts and Jobs Act introduced a complicated provision called Global Intangible Low Taxed Income (GILTI), which creates a new category of foreign income for U.S. shareholders that own 10% or more of a foreign corporation. GILTI income is defined as any foreign income that exceeds 10% of a foreign subsidiary’s Qualified Business Asset Investment (QBAI), which are essentially the fixed assets of each foreign subsidiary with U.S. tax depreciation rules applied.

What that all means is the U.S. introduced a 10% minimum tax on intangible assets from overseas operations, giving the U.S. government more taxing power over things like intellectual property, which many tech firms have historically housed in low tax regimes overseas. Yellen’s plan would essentially replace that GILTI provision with a 21% minimum tax on foreign earnings. 

Can it work?