Global Minimum Corporate Tax Rate

It is one thing to declare that there will be a global minimum corporate tax rate and quite another actually to collect any tax regardless of the rate

 By Anil Madan

In my previous article, I discussed the efforts of the G7 nations and the Organization for Economic Cooperation and Development (OECD) to agree on and establish a worldwide minimum corporate tax rate of 15%. This week, let us take a look at some of the forces and numbers at work as nations seek additional revenues to support their budgets.

In April this year, the Institute on Taxation and Economic Policy (ITEP), a nonpartisan tax policy organization, reported that at least 55 of the largest corporations in the US paid no federal corporate income taxes in their most recent fiscal year that included some portion of the calendar year 2020. ITEP characterized this as a decades-long trend of corporate tax avoidance by the biggest corporations.

But, whereas ITEP calls this “tax avoidance,” it is not necessarily illegal. In most cases, business enterprises, particularly the Multinational Enterprises (MNEs) are simply taking advantage of perfectly legal tax and accounting rules that allow them to defer or reduce taxes.

Indeed, underscoring that the strategies employed are perfectly legal is the fact that some nations actively seek to lure businesses to set up in their jurisdictions with the promise of low corporate tax rates.

Ireland, with a corporate tax rate of 12.5% — among the lowest across industrialized nations — hosts the European headquarters of Google, Facebook and Apple, among other companies. The consulting firm Ernst & Young, reported that Ireland won the most foreign investment projects in Europe on a per capita basis in 2019.Across the European Union, there is a wide range in rates of corporate taxation from a low of 9% in Hungary to Portugal’s 31.5%.

France, among other countries, has tried to levy taxes on digital services. The approach is to try to tax the local sales of behemoths such as Facebook, Amazon, and Google. At stake is taxation of the billions in advertising revenue as well as profits from the sale of data.

Even if the OECD’s member countries are able to work out the specifics of how to implement the new minimum corporate tax rate, as far as the US is concerned, one additional step will be for the US Congress to pass legislation necessary to enact the OECD’s framework into US laws. Here, there is a clash between the approach of the Republicans and Democrats.

President Trump touted his 2017 accomplishment of reducing the corporate tax rate in the US and Republican legislators continue to dismiss any suggestion that taxes on businesses should be increased. On the other hand, President Biden wants to increase the corporate tax rate to fund spending on infrastructure and other needs. The Democrats are unlikely to have enough support to pass a bill increasing corporate taxes. The current US corporate tax rate is 21% so don’t expect legislation to reduce it to 15%. However, US legislation committing to a minimum rate of 15% is not inconsistent with an extant domestic rate of 21%.

Tax avoidance and tax rebates

ITEP’s report on what it calls corporate tax avoidance is based on an analysis of annual financial reports filed by the nation’s largest publicly traded US-based corporations in their most recent fiscal year. The analysis revealed that the companies not paying any corporate taxes represent many different industry sectors and collectively enjoyed almost $40.5 billion in US pretax income in 2020. If these 55 companies had paid taxes at the US rate of 21%, they would collectively have paid $8.5 billion. Instead, they received $3.5 billion in tax rebates. The taxes not paid, plus the rebates, amount to $12 billion of potential revenue lost. But again, it bears emphasis that if companies are receiving tax rebates, it is because the law allows such a result.

For decades, the biggest and most profitable US corporations have found ways to shelter their profits from federal income taxation. ITEP reports have documented what it calls tax avoidance since the early years of the Reagan administration’s tax cuts. ITEP asserts that from 2008 through 2015 federal tax avoidance remained rampant. Trump’s 2017 Tax Cuts and Jobs Act (TCJA) held out the promise of addressing tax “loopholes” that led to such results. But, claims ITEP, it is crystal clear that the TCJA failed to address loopholes that enable tax dodging—and may have made it worse.

ITEP provides examples of the tax outcomes for some of the companies it accuses of avoiding income taxes in 2020. Food conglomerate Archer Daniels Midland had $438 million of US pretax income last year but received a federal tax rebate of $164 million. FEDEX paid no federal tax on $1.2 billion of pretax income and received a rebate of $230 million. Nike, the shoe and sporting goods company reported almost $2.9 billion in pretax income but collected a $109 million tax rebate. Dish Network paid no income taxes on $2.5 billion of pretax earnings. Sales force paid no US income taxes on $2.6 billion pretax earnings.

It is by no means clear that either the OECD accord or the G7 agreement will lead to rules that define “profit” or “income” in such a way that a tax will in fact become due and payable. The complexities involved can be profound. Take the case of Apple, Inc. and its corporate domicile in Ireland.

Back in 2016, the EU Commission ruled that Apple’s tax dealings with Ireland violated European law because Apple got undue tax benefits in Ireland in breach of European state aid laws. The Commission ordered Apple to pay $14.5 billion in back taxes. Both Apple and Ireland denied that any laws had been violated. The EU Commission had made similar rulings against other American companies such as Amazon, Starbucks, and McDonald’s.

Both Apple (the company) and Ireland (the country) rejected the Commission’s accusations. Ireland asserted that its tax setup was entirely legal, and Apple said it paid tax at Ireland’s rate of 12.5% on all the income it generated in that country.

Note that “all of the income it generated in that country” tells us nothing about how revenue was booked and how much income was attributed to Irish operations.

Investment and job creation in Europe

Apple and Ireland said they would appeal the ruling. “Apple follows the law and pays all of the taxes we owe wherever we operate,” the company said. “We will appeal, and we are confident the decision will be overturned.”It added: “The European Commission has launched an effort to rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process. The Commission’s case is not about how much Apple pays in taxes; it’s about which government collects the money. It will have a profound and harmful effect on investment and job creation in Europe.”

The EU’s fine against Apple was its highest-ever fine for alleged corporate tax avoidance, topping the bill of $335 million (€300 million) for Swedish engineering company Atlas Copco to pay Belgian tax authorities earlier the same year. An EU executive said in a statement that the fine could be reduced if other countries sought to get more tax out of Apple themselves, thus corroborating Apple’s comment that the action was really about which country collects the taxes.

The European Commission found that Ireland allowed Apple to dodge international tax rules by letting the company shelter tens of billions of dollars from tax collectors in return for maintaining jobs in the region. About a quarter of Apple’s European staffers, around 5,500 people, are based in the Irish city of Cork, where it is the largest private sector employer.

A preliminary report by the EU in late 2014 had already found, based on early investigations, that tax deals that Ireland granted Apple in 1991 and 2007 were illegal.Then in 2016, the European Commission stated that it has “concluded that Ireland granted undue tax benefits of up to €13 billion to Apple,” adding: “This is illegal under EU state aid rules, because it allowed Apple to pay substantially less tax than other businesses. Ireland must now recover the illegal aid.”

Apple CEO Tim Cook, responding to the claims that Apple engages in a “sophisticated scheme” to avoid paying taxes on $74 billion of revenue held overseas, in 2015 told 60 Minutes: “That is total political crap. There is no truth behind it. Apple pays every tax dollar we owe.” Again, note that saying: “Apple pays every tax dollar we owe” merely tells us about Apple’s compliance with Irish law, not whether it is taking advantage of Irish law to shift profits earned in other countries to Ireland and thus avoiding taxes that would have been payable in such countries.

Cook also sent a message to the larger Apple community in Europe stating: “Thirty-six years ago, long before introducing iPhone, iPod or even the Mac, Steve Jobs established Apple’s first operations in Europe. At the time, the company knew that in order to serve customers in Europe, it would need a base there. So, in October 1980, Apple opened a factory in Cork, Ireland with 60 employees.”

He continued: “We have operated continuously in Cork ever since, even through periods of uncertainty about our own business, and today we employ nearly 6,000 people across Ireland. The vast majority are still in Cork — including some of the very first employees — now performing a wide variety of functions as part of Apple’s global footprint. Countless multinational companies followed Apple by investing in Cork, and today the local economy is stronger than ever. The success which has propelled Apple’s growth in Cork comes from innovative products that delight our customers. It has helped create and sustain more than 1.5 million jobs across Europe — jobs at Apple, jobs for hundreds of thousands of creative app developers who thrive on the App Store, and jobs with manufacturers and other suppliers.”

Cook then went on the offensive, writing: “The European Commission has launched an effort to rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process. The opinion issued on Aug. 30 alleges that Ireland gave Apple a special deal on our taxes. This claim has no basis in fact or in law. We never asked for, nor did we receive, any special deals. We now find ourselves in the unusual position of being ordered to retroactively pay additional taxes to a government that says we don’t owe them any more than we’ve already paid. The Commission’s move is unprecedented, and it has serious, wide-reaching implications. It is effectively proposing to replace Irish tax laws with a view of what the Commission thinks the law should have been.”

Cook also explained: “In Apple’s case, nearly all of our research and development takes place in California, so the vast majority of our profits are taxed in the United States. European companies doing business in the US are taxed according to the same principle. But the Commission is now calling to retroactively change those rules.”

A sovereignty issue

One might have thought that the US would applaud efforts to make US corporations accountable for taxes evaded by relocating to tax havens. Not so in this case. The US government was not pleased with the EU’s decision. The US has previously accused EU regulators of unfairly targeting US companies in its campaign to generate more corporate tax revenue. So, there is more at play here and that has to with who controls the playing field.

Getting back to the EU’s proposed fine, at least for now, Apple and Ireland won. In July 2020, an EU high court ruled in favour of Apple and Ireland. The court stated: ”the Commission did not succeed in showing to the requisite legal standard that there was an advantage.”

Nor is the new tax scheme welcomed by all countries that have prospered from their status as tax havens. Bermuda, for example, although a signatory to the OECD accord, has voiced vociferous objections to it.

In an interview with the Financial Times, Curtis Dickinson, Bermuda’s finance minister, said he was loath to introduce new levies citing the island’s struggle to recover from both the Covid-19 pandemic and the financial crisis of 2008.

“Bermuda has a right to determine for itself what it thinks is an appropriate tax system for its jurisdiction,” he said.

“We have a system in place for 200 years. It’s not perfect. It does require some adjustment. But we would like to do that on our own and not have someone tell us to change our system to fit some global initiative… I would say it’s a sovereignty issue.”

Dickinson added that taxing corporate profits would make Bermuda more bureaucratic and add complexity for business. Bermuda seeks to preserve its role as a global hub for reinsurance, using its tax-free system to lure insurance companies. In lieu of corporate taxes, Bermuda raises revenue through taxes on payrolls and property, customs duties and fees charged to international businesses.

What seems inevitable is that the corporate minimum tax will become a de facto maximum tax. What is also inevitable is that it will take years to structure a workable system that has a uniform and sensible methodology for deciding how much profit that corporations earn is actually subject to being taxed. This means updated rules for treating amortization and depreciation, capital investments, and definitions of what items can properly be deducted from revenues as legitimate expenses.

Another looming problem is that a larger and larger share of e-commerce is being handled by smaller companies that are not as easily susceptible to tax capture.

The long and short of it is that it is one thing to declare that there will be a global minimum corporate tax rate and quite another actually to collect any tax regardless of the rate.

The European Commission has appealed the court ruling in favour of Apple and Ireland alleging errors of law. It is anticipated that a ruling should issue by early 2023.


* Published in print edition on 13 July 2021

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