U.S. Agrees that Time is Now for a Global Minimum Corporate Tax Rate
April 7th, 2021
April 7th, 2021
On Monday, new U.S. Treasury Secretary Janet Yellen spoke in front of the Chicago Council on Global Affairs. Amidst ongoing discussions in the U.S. about a proposed $2 trillion economic plan, as well as discussions on financial responses to the pandemic and the Biden administration’s proposed economic and investment policies, Yellen revealed that the U.S. is now formally calling for a global corporate minimum tax.
This is a big deal. This is an idea whose time has come, and there could not be a more pressing time to implement it.
It’s also a stark change in the U.S. Only one year ago, former President Donald Trump’s stimulus plans created a tax loophole that profited some of the biggest fossil fuel companies in the U.S.
The minimum corporate tax rate has most recently been recommended by the United Nations Financial Accountability, Transparency, and Integrity (FACTI) Panel. The FACTI Panel made waves by coming out in favor of a global minimum corporate tax of 20-30 percent earlier this year, among other far-reaching recommendations like establishing a UN global tax body. As the FTC wrote in response, the UN FACTI Panel “established a new global standard on financial transparency,” including its call for a UN Tax Convention.
The minimum corporate tax rate has also been pushed by the Organisation for Economic Cooperation and Development (OECD) in its BEPS 2.0 plan. However, the OECD’s proposal has no rate, and tax haven countries like Ireland are lobbying for it to be as low as possible, i.e. just above the Irish corporate tax rate of 12.5 percent. Such a result would be a Pyrrhic victory, and would effectively be a minimum in name only—one that may end up effectively becoming the maximum rate in almost all countries.
At the FTC, we believe that a 25 percent rate should be the minimum, a rate also endorsed by the Independent Commission on Reform of International Corporate Taxation (ICRICT). While Yellen didn’t mention a rate, it would likely come in around the proposed U.S. minimum rate of 28 percent.
As with the UN FACTI Panel release, Yellen specifically linked damaging corporate tax cuts to declining governmental resources—part of the “race to the bottom” to attract corporate investment. For instance, while the U.S. under the previous administration lowered its corporate tax rate to 21 percent, Washington still hasn’t been able to compete with other jurisdictions like Ireland. Globally, average corporate tax rates for countries in the OECD have followed suit, dropping from 32.3 percent in 2000 to 23.3 percent in 2020, without any noticeable benefit to wider society.
The move toward a global minimum corporate tax rate matters even more for developing countries. For instance, African nations collect on average 18.6 percent of their total tax revenue in corporate taxes, while the figure in Latin America is 15.5 percent, compared to the OECD country average of 9.3 percent. Yellen highlighted such discrepancies in her comments. “Another consequence of an interconnected world has been a thirty-year race to the bottom on corporate tax rates,” Yellen said. “Competitiveness is about more than how U.S.-headquartered companies fare against other companies in global merger and acquisition bids. It is about making sure that governments have stable tax systems that raise sufficient revenue to invest in essential public goods and respond to crises, and that all citizens fairly share the burden of financing government.”
The global tax justice movement—which includes the FTC, working to highlight the issue of tax justice time and again—has for years argued for greater measures to increase corporate tax transparency. One of the best policies for this remains public Country-by-Country Reporting, which reveals where corporations pay taxes—and which is finally advancing in the European Union after years of back and forth discussions. It’s this type of transparency that actually enables governments to collect corporate taxes, as it makes hiding and shifting profits to tax havens more visible, and thus more detectable.
And Yellen’s comments reveal that momentum is clearly pushing in a welcome direction. Earlier this year, after the UN FACTI Panel proposed a global minimum corporate tax, the U.S., U.K., and large European Union member-states were among who felt that FACTI Panel was duplicating efforts from groups like the OECD. However, Yellen’s announcement shows that the UN FACTI Panel is no longer alone—nor the highest-profile voice to call for a global minimum corporate tax. (Whether the U.S. will agree with the remaining FACTI Panel recommendations, such as public beneficial ownership registries, remains to be seen.)
While not mentioning the role of the UN in governing global taxation, Yellen did refer to multilateral bodies, and in particular the G20, as a venue for pushing a global minimum corporate tax. The rest of Yellen’s comments are worth highlighting in full:
President [Joe] Biden’s proposals announced last week call for bold domestic action, including to raise the U.S. minimum tax rate, and renewed international engagement, recognizing that it is important to work with other countries to end the pressures of tax competition and corporate tax base erosion. We are working with G20 nations to agree to a global minimum corporate tax rate that can stop the race to the bottom. Together we can use a global minimum tax to make sure the global economy thrives based on a more level playing field in the taxation of multinational corporations, and spurs innovation, growth, and prosperity.
The FTC’s new director, Matti Kohonen, praised Yellen’s comments, calling for governments elsewhere to echo her calls.
“Secretary Yellen’s comments highlight how necessary a global minimum corporate tax rate truly is,” Kohonen said. “The past few years, and especially the ongoing pandemic, have proven just how damaging corporate tax cuts have been in reducing available resources for states to meet their human rights and gender equality commitments. The ‘race to the bottom’ has been driven by the perception that footloose multi-national corporations are chasing lower corporate tax rates and devising abusive tax schemes, arguing that they’re needed for investment. But this is false, not least because these corporations make investment decisions on a wide range of factors, and tax rates are rarely on the top of their list.”
While corporations have continued to benefit from the corporate tax cuts, the most vulnerable populations are the ones who suffer. Declining governmental resources have outsized impacts on women, children, and indigenous communities, who are disproportionately reliant on social protection and other public services. Due to declining revenues, governments are also forced to cut resources for things like environmental protection, like we have seen during the pandemic, from national parks like Big Sur in California to protected indigenous people’s areas in the Amazon, all of which are under threat due to lack of legal protections and safeguards.
Small- and medium-sized companies are more likely to pay higher rates of corporate taxes, while large multinational companies can utilise tax loopholes, abusive tax schemes, and international operations—all of which provide much more of an unfair advantage to these multinational corporations. It’s time this abusive behaviour stops. Small- and medium-sized businessesare the backbone of most economies around the world, and need to be at the forefront of a just, feminist, and green recovery.
Much work remains, but one thing is clear: Between Yellen’s comments and the UN FACTI Panel recommendations, momentum is clearly building toward a global minimum corporate tax—and for a more just and equitable tax system for everyone.