Act I: The U.S. decides to issue the crazy as part of its plan to contain the economic effects of the pandemic.
Act II: newly elected President Joe Biden and his Treasury Secretary, Janet Yellen, state – showing absolutely no shame – that the United States will be able to finance such issuance by raising corporate taxes “if the rest of the world agrees to raise those taxes.”
Act III: The G7 finance ministers in London agree to promote reform of the world tax system so that “the right companies pay fair taxes where they should pay them.”
What is the name of the play?: Chronicle of a predictable tax cartelization.
Beyond humor, which is increasingly difficult to maintain when dealing with international taxation issues, this G7 initiative, which essentially aims to introduce a global minimum tax of 15% for multinational companies in each country in which they operate, is deeply flawed.
In that context, the main purpose of this first column I am going to devote to the subject is to explain what the G7 is proposing, why it is bad for the world’s tax payers, and what I think is going to happen next.
Before that, however, a couple of general thoughts:
- Taxes are but one component of the prices of the goods and services we purchase and consume on a daily basis. Since we have known for 4,000 years that neither minimum prices, nor maximum prices, nor suggested prices work, we must conclude that the same is true of taxes.
- Establishing a global minimum tax on corporate profits is – in addition to something that will not work – a direct attack on the sovereignty of hundreds of states and jurisdictions, and the implicit acceptance that the system of high taxation does not work and must therefore be imposed by force. In other words, creating a sort of handicap in favor of the tax hells implies a tacit acceptance that the battle between tax havens and tax hells, when played without such outrageous third-party intervention, was being won by the former.
- Tax competition, at all times and in all places, favors the tax payers. Cartelization favors the voracious states. Yellen’s degree of excitement in announcing that her country – after having for decades promoted tax competition both globally and domestically – now supports the creation of a global minimum tax on corporations to end “30 years of a race to the bottom in corporate tax rates” is therefore not surprising. The question is, who did this drop hurt and who did it benefit? Let’s remember that these were also 30 years of increased investment and employment, and reduction of poverty and misery, in addition to three decades of incredible inventions such as the Internet, among others.
- States can determine who should pay the tax to their collection agencies, but not who ends up paying them; and it is clear that all the companies affected by this new tax will end up transferring this higher cost to their prices. Thus, those who will pay this tax will not be the companies but the consumers.
- Cartels are always bad, be it OPEC, OECD, Sinaloa or Jalisco. No, I don’t think I’m going too far with this comparison. If the previous sentence made a little noise to you, stop for a minute to think about the logic behind this proposal: as the countries that make up the G7 (and the same applies to those that make up the G20 and those that manage the OECD) are inefficiently managed, are deeply in debt and therefore need to collect a lot of money, the States that are reasonably sized and efficiently managed should be forced to collect more than they need.
- Preventing countries from being able to compete on taxation will undoubtedly hamper the ability of poor countries to attract investment.
Most of those who promote this global minimum tax point out that it is a way to homogenize the international tax system, preventing corporations from shifting their operations from one country to another in search of greater advantages.
I don’t know what you think, but to me it seems to be an excessively weak argument in the face of all the problems pointed out above in this section.
In fact, the U.S. argument seems more honest, which basically involves openly accepting that, without a global minimum, the country would not be able to finance its $2 trillion infrastructure project through a 28% tax increase, as is the intention of its president and his economic team.
What does the global minimum tax proposal consist of?
Let us now move on to the analysis of the proposal in question, which will surely become the norm in the short term despite the logical opposition of countries such as Ireland and others. In fact, I would not be surprised if there are further announcements after the meeting of the finance ministers of the G20 countries in Venice next month.
The idea of this “global minimum” is, as stated, to stop the competition between countries to offer lower and lower taxes to large corporations (and, transitively, their clients). While this is by no means a novelty, but on the contrary something that has been on the OECD’s agenda for almost a decade, the strong backing of the White House has undoubtedly been a turning point.
What this initiative establishes in concrete terms is that multinational companies that reach a certain turnover (it is not yet clear which companies would end up qualifying as such) will have to pay taxes wherever they sell their products, regardless of where they have their headquarters and/or operations.
In short, this proposal is a frontal attack against jurisdictions that set low corporate income taxes and have therefore been used for decades by the world’s largest companies to establish their headquarters there. Specifically, the aforementioned Ireland, whose current corporate income tax rate is 12.5%.
But Ireland is not the only country in the world with rates lower than the proposed 15%. In fact, Hungary currently has a rate of 9% and Bulgaria 10%. Moreover, it is not clear that the minimum rate will end up at 15%, since Biden’s proposal was to use 21% as a benchmark, something that would give him more leeway to raise taxes in the United States.
If so, other European countries such as the Netherlands, Lithuania and Latvia, all of which currently have rates of 15%, would be among the losers. The other big unknown is what China will do.
In my opinion, although it is always difficult to reach this type of agreement at a global level, the U.S. U-turn may be decisive for it to happen sometime in 2022. But beyond my opinion that this programmatic agreement will be implemented at some point, let us remember that the devil is always in the details.
In this sense, the following doubts remain for the moment, all of them more than relevant:
- Which companies will end up affected by this global minimum?
- What will happen to the other incentives to attract companies that governments around the world tend to use, beyond lower taxes? We are referring, of course, to exemptions, subsidies, credits or any mechanism that ultimately favors the companies that end up affected by this minimum tax.
- Finally, do the G7 bureaucrats really think that the tax lawyers of the big companies are not going to come up with a way to structure their activities in order to minimize the impact of the rules they are going to approve? Every rule has loopholes and this one will be no exception.
I have read many columns in recent days predicting, as they have been doing since 1998, the end of tax havens.
The reality is that, as long as there is legal uncertainty in the world and an unprecedented fiscal voracity; and on the other hand, attacks against privacy and the property rights of individuals continue, there will be tax havens for a long time. And how lucky we are that they continue to exist!
Tax havens didn’t disappear with the elimination of bearer shares, with the prohibition to have differentiated tax regimes for residents and foreigners, with the obligation to sign bilateral agreements that enable the exchange of information between countries, with the Panama Papers, with FATCA, with CRS, with BEPS or with the Economic Substance laws; and they will certainly not disappear as a result of this unfortunate initiative.
Martín Litwak is founder and CEO of @UntitledLegal, a legal services boutique specializing in international estate planning and the establishment of investment funds, and -at the same time- the first “Legal Family Office” in America. Martín is also a teacher, lecturer and author of Cómo protegen sus activos los más ricos (y por qué deberíamos imitarlos) and Paraísos fiscales e infiernos tributarios.