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For decades, corporate tax rates across national boundaries have been a major issue of economic contention.
Some localities have long participated in a “race to the bottom” in order to attract international companies by implementing lower and lower corporate tax rates.
Of course, that angered other countries, including the United States, which saw such efforts as a means of shipping jobs overseas and of avoiding taxes in places where a majority of a company’s business was actually done.
Late last week, however, leaders from 136 nations came to a landmark agreement that could drastically change relocation incentives for large international businesses.
For the first time, jurisdictions representing more than 90 percent of global gross domestic product have committed to a worldwide minimum corporate tax rate of 15 percent.
Achieving any type of widespread agreement in international politics is difficult, but this one proved to be a particular challenge.
A few holdouts that had been using their own lower corporate tax rates to attract international businesses were (understandably) reticent in closing the deal.
Ireland, for instance, though a relatively small economy, has successfully wooed a great deal of international investment over the years largely through its comparatively low corporate tax rate (to the extent that an area in south-central Dublin came to be known as the “Google Quarter”). Yet, after receiving assurances that the 15 percent rate would not be later increased, and being promised that small businesses would not be subject to the new minimum corporate tax rate, Ireland got on board.
Hungary, likewise, had long been skeptical of a global minimum corporate tax rate — but Hungary, too, also ultimately accepted the deal, attracted by the lengthy implementation period (implementation of the agreement is scheduled to begin in 2023, and the word “begin” is doing a lot of heavy lifting in that phrase).
The global minimum corporate tax rate may be the real game changer, but the deal does have other components, some of which would have been huge news in the corporate world all on their own.
For example, certain provisions require multinational companies to pay taxes wherever they generate sale and profits, as opposed to only where said companies have a physical presence. This could have a significant impact on a number of large tech companies, including Amazon and Google, that have concentrated profits in what are now low-tax countries.
While it is a major achievement to have reached an agreement of this scope among dozens of countries representing the large majority of the world’s wealth, there is a major catch.
Much like the Paris Agreement regarding climate standards, the minimum corporate tax rate deal requires countries to internally pass domestic legislation in order to implement it.
In the United States, treaty ratification must be accomplished by securing approval of at least two-thirds of the U.S. Senate. That isn’t going to happen with the Senate divided 50-50, and I bet you have a pretty good guess as to which party’s senators are going to torpedo anything that could possibly be perceived as an achievement in the current political climate.
But Treasury Secretary Janet Yellen recently said she was “confident” that the minimum global corporate tax rate would pass through the purportedly coming budget reconciliation bill, which requires only a majority Senate vote (with Vice President Kamala Harris breaking any tie).
There could be legal challenges to implementing the worldwide minimum corporate tax rate agreement this way — Republican senators sent a letter to Yellen expressing their opinion that the agreement is an international tax treaty which requires ratification by two-thirds of the Senate.
Yellen did not seem convinced though, and it remains to be seen whether Republicans would risk challenging implementation of the agreement after-the-fact if it passes through reconciliation.
Jobs and corporate earnings have tended to flow out of rather than into the United States in recent decades, so a voluntary agreement among countries to stop trying to undercut U.S. tax rates is probably going to be pretty popular once/if the average American voter actually finds out about it.
A minimum corporate tax rate that applies equally across national borders just makes sense. It doesn’t incentivize nations to accept increasingly smaller crumbs from the tables of massively profitable global conglomerates, and it would do a lot toward keeping businesses located where they are actually doing business.
Hopefully this international minimum corporate tax agreement has an easier time getting, and staying, implemented than did the Paris Agreement.
Jonathan Wolf is a civil litigator and author of Your Debt-Free JD (affiliate link). He has taught legal writing, written for a wide variety of publications, and made it both his business and his pleasure to be financially and scientifically literate. Any views he expresses are probably pure gold, but are nonetheless solely his own and should not be attributed to any organization with which he is affiliated. He wouldn’t want to share the credit anyway. He can be reached at [email protected].