Joe Biden’s administration is keen on winning political victories before the 2022 elections to secure seats, and a recent move by the president has thrust him into the international spotlight. Biden is attempting to curb the profit-hiding activities of multinational corporations by introducing a global corporate minimum tax. The new global corporate minimum tax of 15% would try to ensure that corporations everywhere pay a base fee to the location’s government. This minimum tax rate is lower than the current 21% in the United States, but it is higher than corporate taxes in Bermuda and the Bahamas. Under the minimum global minimum corporate tax rate, large corporations could still shift money around, but they would pay a base rate regardless of where the money goes. This measure will not end the shadowy game of accounting that many companies play. Still, it will curb the tax-reducing effect that tropical account shifting has on multinational financial books.
The sudden urgent push for this measure is due to multiple reasons. Covid-19 relief and emergency measures have strained the government pockets of almost all countries in the western hemisphere. This money strain is especially true for governments in southern Europe that rely on tourism money. Another reason is that digital multinational companies can heavily operate in foreign countries but barely pay any taxes. European powers have felt robbed by tech giants like Facebook, making banks off European citizens without paying coins to the local governments. Accountants can take any money earned from European operations and funnel it through Ireland, a corporate tax hub. Governments may also be afraid of the rising influence of global tech firms, including well-known companies such as Google, Apple, Facebook, and Microsoft. Taxation might become that issue that could finally reign on the big tech parade of recent years. A final reason for the tax measure would be discouraging corporations from hiding their money abroad through schemes like the “double irish.”
The global minimum corporate tax could change the corporate structuring and political landscape significantly. This measure could force smaller tax havens to offer new enticing services to corporations or go extinct. Government budgets for social services could increase due to the new influx of corporate tax funds from multinationals. In places like the United States, corporations might start investing money back into local or state economies instead of only looking abroad for lower tax rates. Politically the minimum corporate tax might prevent politicizing the reduction of corporate tax rates for many countries; However, these positive effects are not guaranteed.
Biden’s efforts to ruin the corporate bonanza might be stifled by reality checks from various sources internally and externally. One issue is that other countries could ignore the global minimum corporate tax rate and provide companies a new home. Major countries ignoring the global minimum corporate tax would place countries that follow the new measure in a lousy position compared to non-compliant nations. Another issue is that the EU could fail to completely support the measure due to smaller tax haven states attempting to block the implementation of the new tax rules. Monaco is an example of a European entity that would be eager to prevent Biden’s new tax. Internally lobbyists from the big tech corporations could lock up congress until 2020 so that Biden’s plans are ruined. Many lobbyists are probably already talking to representatives about the issue of a global minimum tax right now. Corporations are complicated, and dealing with them requires a universal and enforceable response that might not be realistic in the current political climate.
If Biden manages to promote this measure and get other countries to comply, this will be a big win for congressional Democrats. Democrats need an anchor for the upcoming 2022 elections if they want to dream about keeping a majority in both houses. Failing to pass a headline initiative will tarnish Biden’s reputation to many Americans and give the new class of Republicans a shot to stall the president until whatever happens in 2024. Proper handling of the covid-19 pandemic and a major tax initiative would be a massive win for the blue team.
The battle for the new tax structure will not be easy, but in many people’s eyes, reigning in corporations is a worthy cause. Big tech corporations have operated with few restrictions for the last few years, and many governments are now trying to end that trend. Biden will have a lot of work on his hands in the coming days.
Sources: https://www.reuters.com/business/us-treasury-says-g7-expected-endorse-us-global-minimum-tax-proposal-2021-06-02/, https://www.washingtonpost.com/us-policy/2021/05/31/global-minimum-corporate-tax-biden-g7/, https://www.investopedia.com/terms/t/taxhaven.asp#:~:text=A%20list%20of%20some%20of,Kitts%2C%20and%20Nevis.