As of next year, every corporation may have to begin paying at least 15% in corporate taxes, regardless of which country it calls home.
Will every corporation in the world really start paying at least 15% tax next year?
It certainly seemed like a landmark when 137 nations agreed in July 2021 on the Inclusive Framework on Base Erosion and Profit Sharing 2.0. “Pillar One” of the BEPS, as tax insiders call it, states that companies should pay tax where they earn their profit. It only applies to those with turnover above €20 billion ($21.6 billion) annually.
Pillar Two, which has provoked more controversy and headlines, is the 15% global minimum tax. Put simply, if a US, German or UK company pays less than 15% by shifting profit to Ireland, Switzerland or the Cayman Islands, its home country could “top up” to collect the difference. That’s putting it very simply.
“This puts an end to the craziness where you could reduce your tax burden legally, massively, and in complete contradiction with the spirit of the law,” says Pascal Saint-Amans, director of the center for tax policy at the Organization for Economic Cooperation and Development, the multilateral forum that shepherded the agreement.
The OECD put some pretty massive numbers out there, too. Pillar One will reallocate $100 billion a year between jurisdictions, while Pillar Two hikes total corporate levies by $150 billion, the Paris-based institution estimated. The International Monetary Fund lately raised that Pillar Two figure to more than $200 billion as the “race to the bottom” between nations on corporate tax rates abates.
Nearly a year later, though, the details are proving more than devilish. Having 137 finance ministers ink a declaration of principles is one thing; passing relevant tax code changes in 137 different countries is quite another. The European Union enthusiastically embraced BEPS 2.0, publishing a “draft directive” in December. But making that into law requires unanimous consent from the 27 EU member states. Poland is leading a group of holdouts pushing to maintain ad hoc tax preferences.
US alignment with the BEPS framework would seem to require raising its so-called Global Intangible Low-Taxed Income levy from 10% to 15%. Congress created the GILTI as part of its systemic 2017 corporate tax reform. President Biden’s administration favors the hike. Republicans, who are tipped to recapture at least one chamber of Congress this autumn, maybe not so much.
Switzerland, whose “patent boxes” and other intellectual property exclusions attract pharmaceutical multinationals, among others, needs a constitutional amendment to join the BEPS regime. That can only happen in 2024 at the earliest, says Christian Frey, deputy head of finance and taxes at business lobby economiesuisse. The OECD wants the new rules to go global in 2023. “The OECD is concerned with an extremely ambitious timetable, but Switzerland has a very slow political process,” Frey comments.
In the long run, India may win from the 15% minimum tax. But to join BEPS it will have to sacrifice a digital services tax aimed at raising revenue from its burgeoning online economy. This DST raised objections from Washington, because it would largely have impacted US-based global giants—a dynamic at play in many other developing nations. “A lot of the global south has been looking at how India would respond” to the BEPS pact, says Paul Monaghan, chief executive of the London-based Fair Tax Foundation.
But if BEPS 2.0 is far from done and dusted, executives would make a mistake to assume it will all blow over, or that they can wait for the fine print to be finalized to start preparing. Last year’s agreement shoved the tanker of multinational taxation in a clear direction, even if its exact speed and endpoint is undetermined, says Manal Corwin, principal in charge of KPMG’s Washington national tax practice. “By the time we retire, we may be up to BEPS 30.0,” she quips. “Capturing the relevant data is a journey you shouldn’t wait to start.”
The problem of corporate tax avoidance is real, and the world’s big economies are fed up. Current tax systems, designed for bricks and mortar, have not coped with an age where the richest corporations ascribe much of their profit to intellectual property, which can be registered anywhere. E-commerce king Amazon, for instance, paid 6.1% in US federal taxes last year, compared to its statutory rate of 21%, reports the Institute on Taxation and Economic Policy. German pharma and chemical giant Bayer cut 10 percentage points off its 2020 tax bill by booking earnings in the Netherlands or favorable states within Germany, a European Parliament report found. “Corporations have made a money machine out of tax disparities for the past 30 years,” says Thornton Matheson, a senior fellow at the Urban-Brookings Tax Policy Center in Washington.
Even if BEPS 2.0 crashes and burns, many countries are pushing along the same track unilaterally, adds David Bunn, vice president of global projects at the Tax Foundation in Washington. The US GILTI will rise to 13.125% in 2026 under existing law, not much less than the 15% BEPS threshold. The UK adopted an offshore intellectual property surtax in 2019. Germany enacted a “royalty barrier” to prevent profit leaking from headquarters to lower-tax subsidiaries. And so on. “Avoiding taxes on IP in the Netherlands, Ireland or the Caymans is already going the way of the dodo,” Bunn says.
One more factor supporting a 15% global minimum corporate tax: The alternative might be worse for the most-affected multinationals, as every nation tries to soak them on its own. India’s 2% digital services tax, or “equalization levy,” is a case in point. New Delhi imposed it in 2020, then withdrew it in favor of the global BEPS regime.
A heftier dispute brewed late last decade when France, under Emmanuel Macron’s leadership, enacted a 3% digital services tax. Half a dozen other big economies, including the UK and Canada, promised to follow suit. Former US President Donald Trump threatened to retaliate with levies on French imports from champagne to handbags. Both countries signing up to BEPS froze the controversy.
Faced with this potential Babel of competing national taxes, Silicon Valley quietly joined forces with official Washington to get BEPS 2.0 done. “Rather than have national DSTs, Big Tech reluctantly came on board” fair-tax advocate Monaghan says.
That hardly means that all the i-s on BEPS 2.0 are dotted, or industry is not lobbying over the fine print. One battle royal is raging over whether to count deferred tax toward the 15% minimum due, Monaghan says. This isn’t trivial for tech and pharma powers who are depreciating huge capital investments, the most common source of deferred tax liabilities. Coming back to Amazon, Jeff Bezos’ juggernaut reported over $1 billion of federal income tax expense in 2019. But $914 million of that was deferred; the company’s actual payments to Uncle Sam were $162 million.
A broader question is how governments encourage future innovation while cracking down on tax structures that have arguably helped fuel the last generation’s leaps-and-bounds progress. Even as they decry existing IP tax havens, nations vow to accelerate the drive toward renewable energy, artificial intelligence, and other presumed blessings of the future. This will largely need to happen through private investment massaged by public policy, not least tax policy.
Some business groups argue that the rules the OECD is preparing for BEPS 2.0 would threaten capital spending on some social goods, including R&D. “In the absence of [existing] tax incentives, the economic return from these activities would be insufficient,” an alliance of US business organizations warned in a letter to Treasury Secretary Janet Yellen. Frey at economiesuisse is also among those who do not see the reform as “useful,” but he nevertheless recognizes that it is not a responsible strategy to simply hope the idea fades away. “We are,” he notes, “preparing ourselves for the likely scenario that it will be implemented.”