Would A US Wealth Or Global Tax Push Millionaires To Bitcoin Adoption?
There are ways in which a tax on the ultra-wealthy could nudge them toward crypto, but hiding assets is not one of them. Would A US Wealth Or Global Tax Push Millionaires To Bitcoin Adoption?
Levying a progressive tax on the ultra-wealthy has been a talking point long popular with many United States Democrats, yet such a policy would have been unimaginable under a Republican administration and a split Congress.
Now that the Democratic Party is back in control of both the White House and Capitol Hill, the initiative is formally on the table: On March 1, a group of Democratic lawmakers led by Sen. Elizabeth Warren introduced legislation proposing an annual tax on the households and trusts worth more than $50 million, including the value of assets such as real estate and stocks.
As new bridges between traditional capital and the digital asset space emerge almost daily, high-net-worth individuals can move value to crypto with more ease than ever before. Would a prospective wealth tax, should it be codified in law, affect their willingness to do so?
Marketed as the Ultra-Millionaire Tax Act, Sen. Warren’s bill proposes a 2% annual tax on the net worth of any household between $50 million and $1 billion, and a 3% tax for those worth more than $1 billion. The framers contend that the burden will only fall on the wealthiest 100,000 households in the nation, or the top 0.05% of wealth distribution.
The lawmakers argue that the initiative could bring in at least $3 trillion in federal revenue over 10 years — a pool of resources that could be directed to support underfunded areas such as education, childcare and infrastructure.
The proposed legislation would have to clear the U.S. Senate before it becomes law. Even though Democrats and Republicans are currently tied 50-50 in the chamber, with the Democratic Vice President Kamala Harris holding a tie-breaking vote, most bills still take at least 60 votes for approval. As Bloomberg noted, Democrats are at least hoping to append some elements of the tax to the budget bill that will be reconciled later in the year.
It doesn’t come as unexpected that the initiative received immediate scolding from the political right and center, along with big business circles. In the weeks after the proposal went public, the Wall Street Journal ran several op-eds arguing that the wealth tax would bring more harm than good.
One argued that a wealth tax for American millionaires and billionaires would affect the ownership landscape in the U.S. stock market: As big U.S. investors would be pressured to sell their most liquid assets at a discount, their counterparts from tax-free jurisdictions would be happy to buy in.
The author of another contended that the outflow of capital from the stock market resulting from taxation of the ultra-wealthy would diminish the value of everyone’s savings.
Billionaire Leon Cooperman told CNBC that while he believes that rich people should pay more taxes, Warren’s configuration of the policy “has no merit.” He added: “If the wealth tax passes, go out and buy yourself some gold because people are going to rush to find ways of hiding their wealth.”
Wait, But Could That Gold Be Digital?
Not A Place To Hide
Granted, Cooperman’s quip about using gold to hide one’s net worth is metaphorical, a reference to the kinds of assets that can be less visible to the government’s eye compared with those sitting in bank and brokerage accounts.
As for the actual gold, the IRS treats precious metals as collectibles subject to long-term capital gains tax. Cryptocurrencies definitely do not belong in either of these categories, as they are neither collectibles (unless they are nonfungible tokens) nor less visible.
If the goal is literally to conceal the wealth, resorting to a store of value that is automatically tracked on an open, immutable ledger doesn’t sound like a good idea.
Maria Stankevich, chief business development officer at cryptocurrency exchange Exmo UK, commented to Cointelegraph: “Today massive BTC adoption is tightly connected not to the shadow money, but quite to the opposite — to its status of the transparent financial asset.” Tim Byun, global government relations officer at crypto exchange OKCoin, added:
“Taxing the ultra-wealthy has little or no impact on the surging adoption among all Americans and non-Americans into digital assets, specifically Bitcoin. […] It’s foolish to think that they (as well as anyone) will look to Bitcoin as a way to ‘hide’ their wealth given that Bitcoin leaves a permanent digital footprint.”
Douglas Borthwick, chief marketing officer at digital asset firm INX, said that viewing digital assets and Bitcoin (BTC) as a place to hide wealth is “rather off-base.” While U.S. tax residents can still buy Bitcoin on offshore platforms without rigorous Know Your Customer and Anti-Money Laundering requirements in place, there are serious risks associated with delivery and custody. According to Borthwick, millionaires typically resort to other strategies:
“They invest in high-ticket items to guard against inflationary purchases. Think of Masters’ paintings and parcels of real estate. There are many strategies that ultra-wealthy investors employ with their accountants to avoid more significant taxes. I’m not sure that digital assets would lead the charge there.”
OKCoin’s Byun opined that the ultra-rich will continue to preserve their wealth “through tried and true means as they have access to the brightest lawyers, financial advisors and consultants.”
An Indirect Effect?
Even if digital assets are no good for concealing households’ actual net worth, there could be other avenues for a hypothetical wealth tax to heighten millionaires’ interest in crypto. Here’s one:
According to a January report by the tax policy nonprofit Tax Foundation, a wealth tax of 2% to 3% could erase interest earnings on safer investments like bonds and bank deposits. This could become enough of an external shock to make wealthy investors reconsider their portfolios’ structure and recalibrate them so as to give more weight to the more risky yet higher-yield assets.
In other words, the hypothetical tax could embolden the rich to invest in cryptocurrencies and crypto derivatives to offset the stagnating gains from more traditional assets.
Yellen To Urge Global Minimum Company Tax To Stop Venue-Hopping
Treasury Secretary Janet Yellen will argue Monday for a global corporate minimum tax rate as she pushes President Joe Biden’s plans to raise levies on U.S. companies, a person familiar with her remarks said.
Yellen’s comments, reported earlier by Axios, are part of an effort to prevent companies from seeking locations with lower taxes as the administration seeks higher levies on American firms to help pay for a $2.25 trillion infrastructure program.
“Competitiveness is about more than how U.S.-headquartered companies fare against other companies in global merger-and-acquisition bids,” Yellen will say in a speech to the Chicago Council on Global Affairs. “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.”
Yellen will say the U.S. is working with G-20 nations to find an appropriate minimum “that can stop the race to the bottom.”
The U.S. is involved in talks led by the Organization for Economic Cooperation and Development with about 140 countries to develop a global agreement on minimum levies, but participants haven’t yet reached a deal.
Biden’s plan, unveiled last week, includes raising the corporate income tax rate to 28% from 21%. It was lowered from 35% under President Donald Trump. The Biden administration is also seeking a 21% global minimum tax, which would be an increase from the roughly 13% that corporations currently owe on offshore earnings.
“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,” Yellen will say.
Biden Tests Tech Giants’ Support For Global Tax Reform
White House’s proposal clears a path for an overhaul that could cost companies $100 billion.
For the world’s largest companies, global tax policy is proving the adage that you should be careful what you wish for.
European countries have pushed for tax reform for years, and the Biden administration’s latest proposal seems to offer what they asked for. U.S. tech giants said they were willing to pay more if it meant predictable bills. Now those claims may finally be put to the test.
The White House’s $2.3 trillion investment plan relies on 15 years of higher tax revenues underpinned by global rule changes to ensure that firms aren’t handicapped or tempted to flee overseas. The proposal ticks two key reform boxes for Europe’s governments: a global minimum tax to level the playing field and a reallocation of taxation rights so that the biggest companies pay more in countries where they make more revenue, regardless of where their physical assets are.
After years of mostly talk but little action, a tax deal once again seems possible. The U.S. plan differs somewhat from the detailed blueprints put forward by the Organisation for Economic Cooperation and Development last year, but it simplifies the implementation and is likely close enough. The key differences are a higher minimum tax rate than previously discussed and an extension of which companies are covered by the new local taxation rights.
Global tax is a higher priority for President Biden than his predecessors, particularly as it is linked to his infrastructure plan. In the past, OECD digital tax reform progress stalled whenever U.S. engagement waned. Many countries may now compromise to expedite a deal, just in case American priorities change.
Everyone seems eager to put an end to today’s trans-Atlantic tech-tax battle. Frustrated by the slow pace of reform, France, among others, launched digital services taxes in the past years, promising to remove them if Washington negotiated in earnest. Mr. Biden’s proposal may clear a path to a long-term solution.
Both French and German finance ministers expressed optimism this week that a deal could be reached in 2021. Pascal Saint-Amans, who leads the OECD process, said this was a unique opportunity as countries don’t want a tax war and “what the U.S. is proposing now is peace.”
Obstacles do remain. Low-tax jurisdictions will fight hard to keep the business they attract as a result of global companies’ profit-shifting tactics, and the 21% minimum tax rate is much higher than previously discussed. Any global agreement would still need to be enacted by national legislators, which could prove tricky in the U.S. and elsewhere.
Many global companies gained political cover by publicly backing the OECD process, accepting higher taxes in exchange for more predictable bills globally. Investors may now get to see who was bluffing. The OECD estimated that a 12.5% minimum tax would cost companies about $100 billion more annually. Mr. Biden’s minimum tax proposal expects to raise a similar amount globally.
This week, Amazon Chief Executive Jeff Bezos issued a carefully-worded statement backing some tax rises, but business associations are already lobbying hard against any such thing. Stock markets, which reacted enthusiastically to the Trump administration’s profit-boosting tax cuts, have paid little attention to the latest proposals. That may change with a deal, particularly if it makes headway in Congress.
Investors have long been able to comfortably ignore global tax reform. Those days may now be numbered.
New York City’s Wealthy Will Pay Nation’s Highest Tax Rates. How Will That Affect a Rebound?
State set to raise rates on top earners and corporations, hoping to boost public finances without hobbling the post-pandemic economy.
New York this week agreed to increase taxes on its most affluent residents and raise corporate franchise taxes, aiming to boost public finances without further hobbling an economy hit by the pandemic and lockdowns that have spurred remote work.
Business leaders say the increases—which would result in top earners in New York City being charged the highest combined tax rate in the U.S.—could backfire by driving away the very people and companies the city relies on for its revenue.
The $212 billion state budget plan, passed by the Democrat-run legislature and backed by unions and advocacy groups, includes more aid for schools, tenants and small businesses. It also funnels billions into other progressive causes, including investment in renewable energy, money to boost nonprofit arts and cultural centers and payments to workers who don’t qualify for federal aid because of their immigration status.
New York is having a slow recovery. The state’s unemployment rate of 8.9% in February, the most recent data, is second highest among the 50 states and the District of Columbia.
Executives at New York City’s largest employers had rallied against increasing taxes in calls to state and local officials, saying higher rates weren’t necessary to ensure an economic revival and would worsen problems by draining budgets if companies and high earners leave for good.
The risk is especially high, they say, since companies have discovered in the work-at-home lockdown that they didn’t need to keep employees in New York City. For some, the high cost of a flagship office in Manhattan is no longer worth it, and they are taking workers elsewhere, contributing to the commercial-property slump.
Elliott Management Corp., Icahn Enterprises LP, Silver Lake, Blackstone Group Inc. and Moelis & Co. are among the firms that have either moved their headquarters or opened new offices in Florida in the past year. Goldman Sachs Asset Management is considering plans to expand in Florida, which has no state income tax. JetBlue Airways Corp. said it was looking at moving its headquarters to Florida when its New York City lease expires in 2023.
A number of other white-collar employers are embracing a hybrid model that will allow workdays at the office and at home, a shift already reducing office space needs at some companies. Last month, Citigroup Inc. told staffers that some should expect to come back to work only three days a week.
“For every 100 employees, we may need seats for only 60 on average,” JPMorgan Chase & Co. chief executive James Dimon wrote Wednesday in a letter to shareholders. “This will significantly reduce our need for real estate.”
Mr. Dimon said the bank would continue plans to build its new Park Avenue headquarters in Manhattan, accommodating as many as 14,000 employees. He supports higher taxes on the wealthy if it betters society, he wrote, but corporate tax rates should be kept reasonable and moderate.
Under the new budget, New York state income-tax rates will rise to 9.65% from 8.82% for single filers reporting more than $1 million of income and joint filers reporting more than $2 million. It adds two new tax brackets: Income over $5 million will be taxed at 10.3% and income greater than $25 million will be taxed at 10.9%. The budget also increases New York’s corporate franchise tax to 7.25% from 6.5% through 2023.
“There’s never been an experiment like this,” said George Walker, chairman and chief executive of investment manager Neuberger Berman. “We’ve never had people leave for over a year and then ask them, ‘Do you now want to move back to this materially higher tax jurisdiction?’ ”
New York was the No. 1 state for population loss in the U.S. from July 2019 to July 2020, according to Census Bureau data.
More than 300,000 New York City households in higher-income neighborhoods filed change-of-address forms with the U.S. Postal Service from March to October last year.
The post-coronavirus drop in New York City’s total revenue forecast in the 2020 fiscal year, which ended June 30, was a less-than-expected $1 billion, with the pandemic’s economic disruptions offset by a surging stock market. The city forecasts a budget shortfall of $4 billion-plus in the 2023 to 2025 fiscal years, affecting the more than nine million people who live and work there.
The New York City Independent Budget Office, a nonpartisan publicly funded agency, said this week real property tax revenue, typically a source of revenue growth for the city, was expected to shrink by $1 billion in the 2022 fiscal year because of pandemic-related declines in rental income for commercial properties and residential apartment buildings.
Property values of hotels and retail space fell more than 20% in fiscal 2021 compared with 2020; office buildings fell 15%, and multifamily residential fell about 8% in the same period, according to the city comptroller’s office.
The result was the largest decline in property tax receipts since 1996. Residential and commercial property together made up about half the city’s tax revenue in fiscal 2019.
On the West Side of Manhattan, the $25 billion Hudson Yards development has hundreds of unsold condominiums, empty offices and closed shops and restaurants. Roughly $2.7 billion in outstanding Hudson Yards specific bonds were issued to pay for the 7 subway line extension and for public parks and housing. The city is responsible for bond payments if revenue from property owners in the Hudson Yards district falls short.
A spokeswoman for real-estate firm Related Cos., which developed Hudson Yards, said there has been momentum in condo sales in recent months and office tenants are accelerating return-to-work plans.
New York City could see a surging economy if the federal stimulus—and the end of the pandemic—drive growth in the second half of this year, city officials said.
Tech companies are still drawn to the city, and they could provide more of a boost. Amazon.com Inc., Facebook Inc. and Alphabet Inc.’s Google have pledged to expand in New York City, though some are spending less than their pre-pandemic forecasts.
Edward Skyler, head of public affairs at Citigroup and a former deputy mayor in the Bloomberg administration, said the pandemic may be more challenging than past crises because of remote work, the uncertain return of tourism and potential cuts to social services and public-safety budgets.
“We did not see these really big challenges to the city’s financial stability after 9/11 and the financial crisis,” he said. “If you cut the services that protect public safety and quality of life, then the place becomes less livable. That’s the sort of 1980s spiral that left us with over 2,000 murders a year. That’s the place where you do not want to be.”
Municipal financing, one of New York City’s longstanding defenses against fiscal shortfalls, also was weakened in the pandemic.
In October, Moody’s Investors Service downgraded New York City, citing the fallout of Covid-19, and kept its outlook negative, meaning the rating could drop further in the next 12 to 18 months. S&P Global Ratings in December revised its outlook on the city’s AA rating to negative, which typically means a one in three chance the rating will be lowered within two years.
Fitch Ratings that month downgraded the city to AA- from AA. The moves likely added to the city’s long-term borrowing costs.
Bondholders are demanding more interest to hold New York City bonds relative to other municipal debt than they did before the pandemic. Thirty-year New York City bond yields averaged about a quarter of a percentage point higher than the AAA rate in the year that ended on March 1, 2020, according to Refinitiv Municipal Market Data. That average spread has more than doubled in the year since.
New York City mayoral spokeswoman Laura Feyer said the direct fiscal impacts of the rating and outlook changes were minimal, and the city has met all its borrowing needs at attractive rates. The city had a record $1.4 billion reserve in the 2020 fiscal year, she said.
The city has begun cutting payroll: It will have 12,000 fewer workers by fiscal 2022, which the mayor’s office estimates will save $350 million.
New York City officials see mass vaccinations and the Biden administration’s $1.9 trillion stimulus as a turning point. The federal legislation includes as much as $100 billion in state and local aid for New York, much of it earmarked for infrastructure, mass transit and small-business programs. New York City is slated to receive nearly $6 billion in direct federal aid and $4.5 billion for education.
New York’s tax proposals were the focus of talks in past weeks among the heads of banks, insurers, law firms, real-estate companies and media firms in the Partnership for New York City, a nonprofit group that represents the city’s business leaders and nearly all of the city’s largest employers.
“We didn’t necessarily persuade representatives in the legislature to go our way,” said Steve Swartz, chief executive of media company Hearst Communications Inc., which employs about 3,000 people in New York City and occupies more than 1 million square feet in Midtown Manhattan’s Hearst Tower. Hearst remains committed to New York, he said after news of the budget deal.
Mr. Swartz, co-chair of the Partnership, said he and other members have more worries about persuading highly compensated finance and professional services employees to return to the city after months of working remotely.
“We just don’t know what the result of this Zoom culture is,” he said. “It’s not the question of if they’re going to leave, it’s if they’re going to come back.”
Pressure on New York also comes from geographic competitors. In February, Florida’s chief financial officer sent a letter to the New York Stock Exchange touting the advantages of moving to the Sunshine State.
The chief executives at several financial firms said they were contacted by Miami Mayor Francis Suarez about Florida’s lower taxes and warmer weather. Mr. Suarez didn’t respond to requests for comment.
Blair Effron, who co-leads investment bank Centerview Partners LLC, said he knows of companies that have moved out of New York or are thinking about it. He is staying put, he said.
Mr. Effron has worked at the office most of the week over the past months, and he hopes a majority of employees will join him as early as this summer. Centerview is primarily an in-office institution that relies on the kind of collaboration best done in face-to-face conversations, he said.
He and others say the arts, culture and sports of New York City are incomparable as well as more accessible with the past year’s decline in housing costs. “If you want to live in a city with all the benefits of what the city brings,” Mr. Effron said, “you’re coming back.”
Plans For A Bigger Pie Of Global Taxes, Sliced Fairly
Multinational companies have long used creative — and legal — ways to shrink their tax bills. One is to book profits from customers in places like Boston and Berlin as if they came from, say, Bermuda, which has no corporate income tax.
Long-stalled efforts to revamp the global tax system are getting a new push, thanks to the pandemic and a policy U-turn from the U.S. The complex proposals boil down to two basic notions: setting a minimum corporate tax rate across the world (think of this as making a bigger revenue pie), and rewriting the rules for allocating that revenue among countries (cutting the pie up differently).
1. Why Is This Coming Up Now?
U.S. President Joe Biden is counting on increased corporate tax revenue to fund new spending on infrastructure and social programs. His plan includes raising taxes on U.S. companies and pushing for a 21% minimum levy for U.S. companies’ foreign income, which could pressure many countries to raise their current rate. Proposals from the U.S. have given fresh impetus to a years-long effort led by the Organization for Economic Cooperation and Development, a club of 37 mostly rich countries, to counter corporate strategies “that exploit gaps and mismatches in tax rules to avoid paying tax.”
2. Is This About More Taxes Or Fairer Taxes?
The two ideas have become linked. Internet companies in particular have long been the target of complaints that they don’t pay their fair share of taxes. The backlash gained momentum during the pandemic, as deep-pocketed technology giants benefited from a surge in online commerce while countries needed funds to pay for the health crisis. Century-old rules for allocating profits to different jurisdictions didn’t anticipate a globalized economy where data is the raw material.
And some countries are also pushing for a global minimum tax to stop race-to-the-bottom competition among governments.
3. Could This Actually Happen?
That’s hard to say. Tax rules are already complex, and some of the proposals can seem fiendishly complicated. Yet global technology giants have mostly supported the OECD process, hoping to avoid a potentially chaotic mushrooming of unilateral measures around the world. What’s more, a new U.S. proposal opens the door to allocating more taxing rights to the countries where companies are making sales, instead of the ones where they’re based.
The plan could mean, for example, the U.S. collects more income tax from foreign companies when U.S. consumers buy handbags made by France’s LVMH, or cars sold by Germany’s BMW AG. The OECD plan would also halt national measures from many countries aimed specifically at taxing tech giants — which U.S. officials and lawmakers have argued were less about fairness and more about targeting American firms.
4. What Would This Mean For Companies?
Those affected would see a major shift. The plan wouldn’t necessarily raise companies’ taxes, but it would likely change where some of their profits are taxed. That has many companies concerned that they’ll face new compliance challenges — a worry the U.S. proposal tries to address –and that they could get caught in disputes between governments trying to assert their new, broader taxing rights.
5. What’s Wrong With The Current System?
The “legal and not-so-legal” use of tax havens costs governments $500 billion to $600 billion in lost corporate tax revenue each year, according to estimates cited by the International Monetary Fund.
The Tax Justice Network, a U.K. advocacy group that says it wants a fairer tax system, names the British Virgin Islands, the Cayman Islands, Bermuda, the Netherlands and Switzerland (in that order) as the top five “jurisdictions most complicit in helping multinational corporations underpay corporate income tax.” U.S. Treasury Secretary Janet Yellen said the goal of the proposed global minimum rate is to end a “30-year race to the bottom on corporate tax rates.”
6. How Would A Global Minimum Tax Work?
Here’s a scenario sketched out in a paper for the Atlantic Council by Jeff Goldstein, a former special assistant to the chairman of the White House Council of Economic Advisers: A company headquartered in Country A is reporting income in Country B, where the rate is 11%.
With a global minimum rate of 15% in effect, Country A would “top up” the tax and collect another 4% of the company’s profit from Country B — representing the difference between Country B’s rate and the global minimum rate. That undercuts any advantage of shifting to lower-tax places and pressures countries to conform to the global norm.
7. Who Benefits From The Current System?
Many large corporations do. At least 55 large U.S. companies, including Nike Inc. and FedEx Corp., reported paying no U.S. federal income taxes in 2020 even though they were profitable, according to the Institute on Taxation and Economic Policy.
And some nations benefit by attracting corporations with low rates. Ireland, with a corporate tax rate of 12.5% — among the lowest across industrialized nations — boasts the European headquarters of companies including Google, Facebook and Apple. Ireland won the most foreign investment projects in Europe on a per capita basis in 2019, according to advisory firm EY.
Among the 27 members of the European Union, corporate tax rates range from 9% in Hungary to 31.5% in Portugal, according to the Tax Foundation.
8. Who Is Leading This Effort?
The OECD is trying to broker an agreement among about 140 countries to write new rules addressing how digital firms are taxed and to create a minimum global levy. It supports the idea of requiring a multinational company to pay at least a minimum rate in every country where it pays tax.
Biden’s proposed minimum rate of 21% for the U.S. is higher than proposals so far discussed at the OECD, which had honed in on 12.5%. Frustrated by a lack of progress at the OECD, some nations, such as France, have imposed so-called digital services taxes on local sales of companies such as Facebook, Amazon and Google — grabbing a bigger share of the pie.
9. How Do Digital Taxes Work?
France led the way, imposing a 3% levy on revenue such as targeted advertising and the sale of data for companies with at least 750 million euros ($894 million) in global revenue and digital sales of 25 million euros in France. Of about 30 businesses affected, most are American, but the list also includes Chinese, German and British as well as French firms.
What Would Biden’s Tax Hikes Mean For Bitcoin?
Tax hikes could encourage profit taking in cryptocurrencies, but some investors remain bullish as ongoing stimulus could trigger inflation.
U.S. President Joe Biden’s proposal to raise taxes to help pay for increased infrastructure spending and other economic stimulus programs could stunt this year’s rally in bitcoin.
Analysts say the largest cryptocurrency has benefited from the government’s record budget deficits, ever since the coronavirus hit the economy in full force in March 2020, with the Federal Reserve helping to finance extra government borrowing by purchasing U.S. Treasury bonds.
Some investors see bitcoin as a useful hedge against inflation, viewing ultra-loose monetary policy and long-term currency debasement as tailwinds for the cryptocurrency. Others see bitcoin as a risky asset whose prices have rallied because of the easy financial conditions, similar to the way stocks have pushed toward fresh records despite the economic turbulence.
Whatever the case, any tax hikes, which still face steep resistance from corporate lobbyists as well as lawmakers from the opposition Republican Party, might represent the first effort to impose fiscal discipline in the U.S. since the coronavirus hit.
“The U.S. actions are not bullish for bitcoin, as tax increases could be a thorn in the recovery and will drag down investments,” wrote Edward Moya, analyst at Oanda, a foreign exchange brokerage firm, in an email to CoinDesk.
Included in Biden’s proposals is an increase in both the corporate tax rate and the individual rate for high earners – the first major tax hike since 1993.
Higher taxes could stall the economic recovery at a time when the Federal Reserve is increasingly vocal about the need for ongoing monetary and fiscal support. Prospects for slower growth could trigger profit-taking across risk assets including cryptocurrencies.
Raising taxes could also offset the widening federal budget deficit, which is estimated to be about 10% of GDP in 2021, the second largest since 1945, exceeded only by the 15% shortfall recorded last year, according to the Congressional Budget Office.
“An improving fiscal and debt sustainability outlook could lead to a stronger dollar and put pressure on crypto assets like bitcoin, which some investors view as a hedge against inflation and currency debasement,” Garrick Hileman, head of research at Blockchain.com, told CoinDesk in an email.
There’s plenty of room for disagreement. Ariel Zetlin-Jones, an economics professor at Carnegie Mellon University who has studied cryptocurrency markets, told CoinDesk that the relationship between economic output and effective corporate tax rates is quite weak, suggesting that other factors might be the key determinant of growth.
It’s also possible that the additional tax revenue might simply embolden lawmakers’ spending plans.
“The likelihood of responsible fiscal budgeting remains low,” wrote Alexander Blum, managing director at Two Prime, a digital asset investment firm. “Continued support from the Fed means there will be more capital looking for new areas to invest in growth.”
That means investors still might look to higher-risk, higher-reward assets such as cryptocurrencies, which have at times in the past been uncorrelated with traditional assets such as stocks and bonds.
For now, more fiscal spending and continued monetary easing appears to be the new normal, both positive for risk assets.
Higher taxes are still just a proposal.
“The present scenario is unprecedented in scale, where a pandemic has driven massive stimulus packages that require continues funding and money printing,” wrote Joe DiPasquale, CEO of BitBull Capital, in an email to CoinDesk.
Germany, France Say Global Tax Deal Could Be Reached In Weeks
Germany and France said discussions on a global agreement on corporate tax rates were entering the home stretch and that a deal could be reached within weeks.
French Finance Minister Bruno Le Maire indicated support for a U.S. proposal to set the minimum rate at 15%, calling it an “interesting and solid basis” for discussion.
“This is a political battle that we have been fighting for with Germany since 2017,” Le Maire said Wednesday at a joint press conference with German Finance Minister Olaf Scholz. “We have spared no efforts to push the discussions forward and find a compromise.”
The Group of Seven nations is closing in on an agreement that could include both a minimum corporate tax rate and encompass digital giants like Amazon.com Inc. and Apple Inc.
If G-7 finance ministers meeting Friday and again next week can find enough common ground, it could provide a foundation for a global deal.
European governments are increasingly confident of an initial accord within the G-7, according to people familiar with the matter, while Japan is also anticipating progress, a finance ministry official said.
Scholz said a deal needs to ensure that digital companies pay a fair tax rate and that a tax agreement could be reached “in a few weeks.”
EU Sets Up Tax Evasion Policy Hub Amid Push For Global Deal
The European Union created a monitoring body to help drive policies against tax evasion and avoidance, just as a global push gathers steam to change the treatment of corporate revenues.
Economy Commissioner Paolo Gentiloni told reporters in Brussels that the new EU Tax Observatory will become “a hub of new ideas” that will inform the bloc’s decision-makers by compiling data, and providing research and analysis.
“As we focus on the recovery after the pandemic, and on massive investment needed to deliver the green and digital transitions, fair taxation is more important than ever,” Gentiloni said. “We need to further strengthen our armory against tax abuse.”
The initiative comes at a time of “unprecedented opportunities” for an international agreement, he added, referring to a global deal being negotiated at the Organization for Economic Cooperation and Development to overhaul taxation rules and make multinationals pay more in countries where they operate.
Momentum toward such an accord has been stoked by proposals from President Joe Biden’s administration that include a global corporate minimum tax of at least 15%. Gabriel Zucman, a University of California at Berkeley economist who heads the new observatory, said that floor was “way too low.”
“All G-7 countries have tax rates that are significantly higher than 15%,” he said, speaking alongside Gentiloni.
The key problem with globalization “is that its main winners — multinational companies and their shareholders — have been able to pay less and less in taxes while other groups of the population that have not benefited as much from international economic integration have had to pay more,” Zucman added.
G-7 Nations Agree On New Rules For Taxing Global Companies
Deal marks step toward adopting a 15% global minimum corporate-tax rate sought by the Biden administration.
The Group of Seven leading rich countries agreed to back new rules for taxing businesses that operate internationally in a significant step toward a global agreement that would deliver the 15% floor that the Biden administration said it could accept.
The agreement, reached by treasury chiefs during a meeting in London on Saturday, resolves some of the long-running tensions between the U.S. and large European economies that have at times threatened to push the international tax system into chaos and spark a trans-Atlantic trade conflict.
Under the deal, G-7 members will back a global minimum tax rate on company profits and a new way of sharing the revenues from taxing the world’s largest and most profitable companies.
The G-7, which comprises Canada, France, Germany, Italy, Japan, the U.K. and the U.S., agreed that businesses should pay a minimum tax rate of at least 15% in each of the countries in which they operate.
“The G-7 finance ministers have made a significant, unprecedented commitment today that provides tremendous momentum towards achieving a robust global minimum tax at a rate of at least 15%,” said Treasury Secretary Janet Yellen.
There are still significant details to be worked out, and the deal isn’t sufficient to see the new rules applied globally. For that to happen, it would need support from the Group of 20 leading economies—which includes China and India, among other developing economies—as well as the backing of the 135 countries that have been negotiating the new rules as part of what is known as the Inclusive Framework. Treasury chiefs from the G-20 are due to meet in Venice on July 9-10.
“There is important work left to do,” said Mathias Cormann, secretary-general of the Organization for Economic Cooperation and Development, which has been steering international efforts to overhaul the tax rules. “But this decision adds important momentum to the coming discussions, where we continue to seek a final agreement ensuring that multinational companies pay their fair share everywhere.”
For the agreement to be completed, the overhaul will have to be approved by a number of small countries that have corporate tax rates below 15%. One of the most significant of those is Ireland, because it hosts the European headquarters of a number of leading technology and pharmaceutical companies.
It has a tax rate of 12.5%, which it has said it wants to keep in place to offset some of the disadvantages of its small size when seeking foreign investment.
“Any agreement will have to meet the needs of small and large countries, developed and developing,” Irish Finance Minister Paschal Donohoe wrote in a tweet Saturday noting the G-7 agreement.
The U.S., which already has a form of minimum tax on companies based in the country, wants to make that levy tougher and raise domestic tax rates to pay for the Biden administration’s new programs. Doing so unilaterally would increase the cost of having a U.S. headquarters, but if other countries imposed similar taxes on their companies, the benefits of escaping the U.S. would shrink.
To prod other countries toward a deal, the U.S. has proposed denying certain tax deductions to the U.S. operations of companies based in countries that don’t impose minimum taxes.
The main aim of European countries has been to increase taxes on large digital businesses such as Google’s Alphabet Inc. and Facebook Inc., most of which are based in the U.S. To do that, an overhaul of the existing rules is needed, because they were designed for an age in which businesses had to have a large physical presence in a country—such as a factory—to be able to make profits there.
“Just because their business is online doesn’t mean they should not pay taxes in the countries where they operate and from which their profit derives,” the treasury chiefs of France, Germany, Italy and Spain said in a joint statement Friday. “Physical presence has been the historical basis of our taxation system. This basis has to evolve with our economies gradually shifting online.”
A number of European countries raised the stakes in the long-running talks by announcing separate, national levies on digital businesses, hoping that would pressure the U.S. to agree to an international deal. In retaliation for what it saw as discrimination against U.S. companies, the U.S. government announced a series of punitive tariffs on imports from those countries, although it suspended those tariffs until the end of this year.
The G-7 agreement brings a possible increase in tax bills for a number of digital businesses a step closer. The alternative to an agreement was likely to be an overlapping series of national levies that could have seen the same profit taxed multiple times in different locations, an outcome digital businesses were keen to avoid.
Large tech companies have long expressed support for an international resolution on how to divvy up their taxes among countries. Executives at the companies argue that they need certainty in tax rules, rather than a patchwork of national taxes like those passed in some European countries—and some privately accept that a global deal may mean an increase in their tax bills.
“A multilateral solution will help bring stability to the international tax system,” an Amazon.com Inc. spokesman said Saturday, adding, “The agreement by the G-7 marks a welcome step forward in the effort to achieve this goal.”
A spokesman for Alphabet’s Google said Saturday: “We hope countries continue to work together to ensure a balanced and durable agreement will be finalized soon.”
An Apple Inc. spokesman declined to comment. Facebook didn’t immediately respond to a request for comment.
The toughest question in the tax talks has been the handling of the largely American cadre of tech giants. European countries wanted those companies to pay more taxes in countries where they do business.
But the U.S. had rejected a deal that focused only on tech companies as both discriminatory and outdated given the increasingly digital nature of most sectors. That has been a consistent position under both the Trump and Biden administrations.
Instead, G-7 countries have agreed to focus the new tax rules on large, global businesses that have a profit margin of at least 10%. They agreed that the right to tax 20% of profits above that threshold would be shared out among governments.
That new approach, suggested by the U.S., may run into opposition in Congress, where some lawmakers are wary of moving before other countries. Some of the changes could require the U.S. Senate to ratify changes to tax treaties, which would take a two-thirds vote and thus at least some Republican support.
“The rationale deviates from the original intent and appears to lack an articulated foundation in tax principles beyond populist appeal,” Sen. Mike Crapo (R., Idaho), the top Republican on the Finance Committee, wrote in a letter last month to Ms. Yellen.
If backed by the G-20 and the broader group of countries involved in the negotiations, the new rules would mark the most radical overhaul of international tax rules since the 1920s, when countries began to negotiate a web of thousands of tax treaties that make up the existing system.
For advocates, a minimum tax rate would end what they say is a “race to the bottom” in recent decades as countries engaged in competitive rounds of tax cuts to draw businesses away from each other.
The Biden administration has proposed raising the corporate tax rate to 28% from 21% and to raise the existing minimum tax on foreign profits of U.S.-based companies to 21% from 10.5% while tightening the rules for that tax. It isn’t clear yet whether there is enough support in Congress, even among Democrats, to raise taxes that much.
Global Tax Deal Holdouts Face Squeeze Under Biden Administration Plan
Shield rule would target companies from countries that reject minimum corporate levy; potential hurdles are seen in Congress.
Some countries might try to stay outside the emerging agreement to impose a global minimum tax on corporations so those nations can use low tax rates to attract businesses. The Biden administration aims to deflect those attempts with a powerful Shield.
The Shield—the Stopping Harmful Inversions and Ending Low-Tax Developments rule—is the administration’s tax threat to the rest of the world, the flip side of Treasury Secretary Janet Yellen’s cooperative diplomacy.
The plan, which would require the approval of Congress, aims to leverage the size of the U.S. consumer market to give other countries a choice: impose a minimum tax or watch the U.S. tax your companies and take your revenue.
It is an aggressive weapon and one that mirrors how the U.S. changed its tax laws in 2010 to prod foreign banks into identifying Americans’ offshore accounts to the Internal Revenue Service.
The Shield faces some significant potential hurdles in Congress, along with likely resistance from foreign governments and multinational businesses.
“Instead of this being called the Shield it should be called the sword, because that’s the way it’s intended,” said Bob Stack of Deloitte Tax LLP, who was a Treasury Department international tax official during the Obama administration.
While the Shield rule has been part of the Biden administration’s international tax proposals for months, it will get more attention as world leaders try to reach a corporate tax deal and as the administration tries to move its tax agenda through a closely divided Congress. Lawmakers have barely started delving into the details.
Congress is already wrestling with the administration’s broader tax agenda, and some of President Biden’s tax-increase proposals might not survive. Republicans oppose the corporate-tax increases, and leading Democrats haven’t embraced the Shield concept.
The Shield is closely tied to the rest of the Biden agenda. The harder it is for corporate income to escape the U.S., the easier it is for Democrats to raise the corporate tax rate without driving business away.
The Shield would work by taking advantage of foreign-headquartered businesses’ desire to operate in the U.S. Under the rule, companies from countries that don’t impose minimum taxes wouldn’t be able to take deductions on many payments sent back home.
Companies would be penalized similarly if they send payments into corporate structures that include low-taxed entities.
Denying such deductions would be the equivalent of taxing that company’s income at the U.S. corporate tax rate—a punitive move designed to pressure countries to change their own tax laws.
In other words, if the global minimum corporate tax is set at 15% and Ireland decides to keep its tax rate at 12.5%, Irish companies operating in the U.S. couldn’t fully benefit from the lower rate back home. The U.S. would essentially tax much of their income at 28% under the Biden administration’s plan.
Separately from the Shield rule, the U.S. would raise the minimum tax it imposes on U.S. companies’ Irish profits, and that combination would reduce the benefits of Ireland’s low tax rate and could undercut the country’s tax base.
“When you understand all the details, you would see that it doesn’t require absolute agreement across the board,” Ms. Yellen said after the Group of Seven finance ministers’ meeting this month. “It has a way of bringing holdouts into it.”
The G-7 finance ministers and then the countries’ leaders agreed to back at least a 15% minimum tax, which will be considered by a broader set of countries including India and China.
It might prove hard to sell the idea to some of them. Years of work in developing a consensus about minimum taxes and taxing an increasingly digital economy are expected to culminate in the next few months.
The Treasury Department estimates that the Shield rule would raise $390 billion over a decade, more than the administration’s proposed capital-gains tax increase. That figure is based on the assumption that other countries don’t adopt minimum taxes, so the direct revenue from Shield is likely to be less than what would be obtained if the proposal works as intended.
The Shield is even more aggressive than what other developed countries might do as part of their minimum taxes. It would deny full deductions while those other countries would just top companies up to the minimum tax rate. It is designed to be a forceful incentive and is unlikely to be changed, a senior Treasury Department official said.
“That is a very blunt instrument,” said Barbara Angus, former chief tax counsel for the Republicans on the House Ways and Means Committee, now at Ernst & Young LLP.
Some foreign-headquartered companies could face significant tax increases on their U.S. operations, said Nancy McLernon, president and chief executive of the Global Business Alliance, a coalition of such companies.
The Shield could affect their willingness to invest in the U.S., potentially imposing tax rates that would overcome the U.S.’s nontax advantages, she said.
“The U.S. doesn’t have to have the lowest rate in the world,” Ms. McLernon said. “We’ve got a lot of other things that drive U.S. competitiveness. But we can’t be materially out of step.”
Republicans on Capitol Hill have expressed skepticism over the Shield rule.
“I understand the basics of what that is and I don’t see, personally, how that is going to work,” Sen. Mike Crapo (R., Idaho), the ranking member of the Senate Finance Committee, told Ms. Yellen during a hearing on Wednesday.
Beyond the difficulty of securing enough votes in Congress for the broader Biden tax agenda, leading Democrats also aren’t necessarily embracing the Shield.
An international tax plan from three Senate Democrats takes a more modest approach to foreign-headquartered companies. A House Ways and Means Committee aide said lawmakers are aware of the Shield’s goals and are in dialogue with the administration about what is possible.
If passed, the Shield would require the U.S. to collect data on what companies are earning and paying in jurisdictions around the world. The proposal is based on companies’ actual tax rates, not the statutory tax rates in various countries.
The proposal includes language to prevent companies from routing payments through high-tax countries to avoid the penalties associated with payments to countries without minimum taxes.
Another potential problem that Treasury Department officials are considering is the idea that countries could adopt minimum taxes that avoid the Shield and then give companies subsidies that would have the same effect as a lower tax rate. That is just starting to draw attention from policy makers and could be difficult for the U.S. to police.
Amazon To Be Covered by Global Tax Deal Despite Thin Margins
Global policy makers are crafting their international tax plan to make sure Amazon.com Inc. is included, even though the U.S. company’s profit margin is below the 10% proposed threshold that would give other countries rights to collect revenue.
Group of Seven finance ministers on Saturday voiced support for proposed rules reallocating a portion of profits above a 10% margin to be taxed in other countries, but Amazon has estimated a global operating margin of 7.1% this year. Two people familiar with the negotiations said Amazon will be included, with the particulars of how to design the policy to capture the company still being discussed.
An Amazon spokesperson said the company “fully expects to be in the scope of any final agreement at the OECD,” referring to the eventual deal expected from the Organization for Economic Cooperation and Development referenced in the G-7 statement.
Amazon shares dropped as much as 1.1% to $3,172.20, briefly hitting a session low on the news, before closing the day little changed.
Negotiators are working on the mechanism, the people said. That could include setting a threshold for individual operations that targets Amazon’s more-profitable cloud computing or advertising businesses, rather than the whole company, whose margins are weighed down by heavy investment and thin retail profits.
European leaders have insisted on a way of including all the largest online companies in the tax plan. Group of 20 finance ministers are trying to reach a preliminary deal in July, followed by a more detailed agreement expected later this year.
Even with those international agreements, there would still be considerable uncertainty for how quickly these changes would come for Amazon and other multinational companies. Parts of the deal would have to be ratified and implemented with domestic tax policy in around 140 countries negotiating in talks led by the OECD.
Asked at a press conference Saturday if companies such as Amazon and Facebook Inc. would be captured by the deal to share taxing rights between governments, U.S. Treasury Secretary Janet Yellen said they would be, though she didn’t say how Amazon would qualify given its lower profit margins.
A Treasury Department spokeswoman on Monday declined to elaborate on how Amazon would be part of the scope.
Tech companies have largely supported efforts to update and harmonize international tax policy to bring more certainty to their global business operations, according to Matt Schruers, head of the Computer & Communications Industry Association. But Schruers cautioned against crafting complicated policies to target a specific company or industry.
“What’s most important is to write rules of general applicability that will function well for the broad economy,” Schruers said. “Whether it’s one company or one industry or one sector, trying to write tax rules around a small number of companies is not going to provide the results that we need.”
Reallocating how countries tax multinationals is one part of the accord being negotiated through the OECD. The other part involves setting a worldwide minimum corporate tax rate of at least 15%, a move aimed at reducing the attractiveness of tax havens.
That element of the two-part global deal could actually provide the far bigger boost to government revenues, but it is also subject to disagreement as some small countries say they need low rates to lure investment from multinational firms.
The OECD’s Secretary General Mathias Cormann said earlier Monday on Bloomberg TV that the “at least 15%” minimum corporate tax the G-7 settled on would be a “very significant step forward” that would still leave room for fiscal competition between countries. Yet some, including France, are also pushing for a higher floor, and have said the G-7 deal is just a starting point.
France Pledges To Remove Digital Tax When OECD Deal Implemented
France could make a legal commitment to withdraw its tax on tech giants in order to secure a global agreement to share the rights to capture revenue from the largest multinationals, Finance Minister Bruno Le Maire said.
“As soon as the OECD agreement will be implemented, we will get rid of the French national taxation on digital services,” he said on CNBC on Tuesday. “I’m fully ready to take a legal commitment about that.”
Le Maire spoke before a meeting of the Group of 20 advanced economies, whose governments are poised to approve later this week a deal brokered in talks at the Organization for Economic Cooperation and Development on minimum corporate taxation, and new rules for dividing up the tax revenues from the world’s largest companies.
In 2019, as the OECD talks made little progress, France implemented its own national tax on the digital revenues of large companies. The U.S., which responded at the time with the threat of trade sanctions, has demanded countries withdraw such levies, known as Digital Services Taxes.
Le Maire also said the digital levy that the European Union plans to announce shortly after the G-20 is “totally different” from France’s own such tax as it would not target tech giants.
Global Minimum Tax Deal Marked A Win For Yellen. Now She Must Sell It To Congress
The deal is a key part of President Biden’s domestic tax agenda, which Republicans criticize as harmful to growth.
When the U.S. secured international backing for a global minimum corporate tax last week, it marked an early victory for Treasury Secretary Janet Yellen as the country’s top financial diplomat and paved the way for a key plank of President Biden’s domestic agenda.
People involved in the negotiations credit Ms. Yellen with reviving yearslong talks to clamp down on tax avoidance by multinational firms. The breakthrough potentially set the stage for the most sweeping change in international taxation in a century.
She must now navigate more complex negotiations, such as where to set the precise tax rate and how to implement the agreement—discussions set to begin Friday in Venice among finance ministers of the Group of 20 major economies. Ms. Yellen must also sell the plan on Capitol Hill, where support from all Democrats and possibly some Republicans will be necessary to turn the agreement into law in the U.S.
“Yellen has enormous depth of expertise and trust and credibility, so that’s important,” said Tony Fratto, a Treasury official in the administration of President George W. Bush. “Executing on it I think is still going to be really hard.”
Ms. Yellen, 74, was chosen to lead the Treasury in part because of her economic policy experience and relationships with policy makers around the world forged in her years leading the Federal Reserve. But convincing a divided Congress of the merits of the deal may turn out to be the biggest test of her diplomatic skills.
A global minimum tax is a key element of the Biden administration’s plans to raise taxes on U.S. companies to help finance new spending on infrastructure, education and antipoverty programs. The international tax changes could generate nearly $1 trillion of revenue over a decade, according to Treasury estimates.
But if the U.S. raises its minimum tax and other countries don’t, U.S. companies would be at a competitive disadvantage to rivals in low-tax countries and could seek to shift profits overseas.
The president’s tax agenda faces stiff opposition from Republicans, who say it would cost jobs and slow economic growth, and even some moderate Democrats, including Sen. Joe Manchin of West Virginia, are skeptical. Republicans and business groups also warn about what happens if the U.S. raises the minimum tax but other countries don’t follow suit, a situation that could make a U.S. headquarters address a significant negative for a company.
Ms. Yellen has had several discussions with congressional leaders about incorporating the minimum-tax language in legislation that Democrats plan to advance this year using a process known as reconciliation, which requires a simple majority in the Senate rather than the 60 votes needed for most legislation, a senior Treasury official said this week. Still, with the Senate evenly split and Democrats holding a slim majority in the House, the bill’s fate is far from certain.
The agreement also includes some provisions that may require changes to international tax treaties, which two-thirds of the Senate must approve. Those provisions were crafted to attract bipartisan support, the senior Treasury official said. For example, countries agreed to remove digital-services levies as part of the deal, something Republicans and Democrats have insisted on for years.
Ms. Yellen gained plenty of experience dealing with Congress as Fed chairwoman but was more often playing defense, sparring with Republicans over efforts to more closely scrutinize central-bank policy.
Her nomination as Treasury chief won support from Republicans and Democrats alike. But it is unclear to what extent she can marshal GOP support for the Biden agenda.
“I respect her a great deal,” said Rep. Kevin Brady (R., Texas), the top Republican on the House Ways and Means Committee. But he added, “I think there are too many competing interests here for them to finalize a deal that would be agreeable to Congress.”
Yearslong global tax talks reached an impasse in 2019 over efforts by European nations to give more taxing rights to countries where consumers lived, rather than where the product or service was invented or made.
That idea, dubbed pillar one, would allow them to raise more revenue from technology companies like Apple Inc. and Facebook Inc. But the Trump administration insisted on a provision that would have made some of the rules optional for U.S. companies—a no-go for Europe.
Ms. Yellen dropped the U.S. insistence on that provision, reviving the discussions. The Biden administration was more interested in pillar two—the global minimum tax.
In April, the U.S. offered new proposals on pillar one that would make it simpler to identify which companies would pay more tax to consumer countries, a concession that helped persuade the Europeans that the U.S. was serious about securing a deal.
The talks resumed last month at a meeting of finance ministers from the Group of Seven rich countries in London. U.S. officials believed that a G-7 agreement would build enough momentum to bring along major emerging economies such as Brazil, China and India.
Ms. Yellen met privately with counterparts to persuade them it was in their economic interest to avoid what she called a race to the bottom—competitive rounds of tax cuts to attract investment—and make compromises to secure a deal, a G-7 official said.
Ms. Yellen had an easy rapport with other participants, according to a Canadian government official. She and Canada’s Chrystia Freeland compared notes on being their countries’ first women finance ministers and on mixing motherhood and politics, the official said.
“Many deserve credit for keeping the engagement going, but it is her personal, quiet and at the same time firm diplomacy that has made it happen,” said Kristalina Georgieva, managing director of the International Monetary Fund.
On June 5, the G-7 announced a deal to impose a minimum tax of at least 15% and to give countries more authority to tax the profits of digital companies.
After intense lobbying by G-7 officials, 130 countries signed on to the broad outlines of the overhaul. Negotiators expect the deal will get the backing of G-20 leaders at their October summit.
Countries must then begin hashing out technical details of the framework, said Barbara Angus, global tax-policy leader at the Big Four accounting firm EY and a former chief tax counsel for the House Ways and Means Committee.
“It really is in some senses only the end of the beginning,” Ms. Angus said.
Global Tax Deal Marks Big Advance For Cooperation, But Tougher Tasks Lie Ahead
As the world’s largest economies look past tensions to seal an ambitious tax deal, other common problems such as climate change demand more difficult compromises.
Finance chiefs from the Group of 20 leading economies Saturday are set to endorse an overhaul of the rules for taxing international companies, a landmark achievement of global cooperation after years of tensions.
G-20 members have rarely been able to agree to such ambitious changes over the past decade of disputes over trade, investment and jobs, although they did work together to offset the economic impact of the Covid-19 pandemic. The tax agreement, negotiated earlier this month by 130 countries, has raised hopes that major economies can find common approaches to tackling other global problems, such as climate change and trade.
But raising taxes to pay for the mounting cost of tackling the Covid-19 pandemic is relatively straightforward for governments that all stand to gain, albeit to different degrees, whereas tackling climate change requires more fundamental economic changes and arguments over which countries should bear how much of the burden.
The tax overhaul breaks new ground in two ways. It is the first time that governments have set a floor for the tax rate faced by big international companies. G-20 governments have also overturned a longstanding principle under which profits are taxed where businesses have a physical presence—known as a permanent establishment—rather than where their sales are made.
“These past six weeks have really been momentous for economic diplomacy,” said U.S. Treasury Secretary Janet Yellen. “We’re seeing a revival of multilateralism on a whole host of issues.”
The G-20 finance chiefs arrived in Venice having already agreed to the outlines of the tax overhaul, a goal that seemed unlikely as the year began. Ms. Yellen played a major role in pushing the talks forward, presenting new proposals that ultimately proved acceptable to other G-20 members.
Ms. Yellen wasn’t resting on her laurels on Friday as she began two days of talks with her counterparts in the lagoon city, instead speaking of bigger challenges ahead.
“G-20 countries are responsible for more than 80% of global carbon emissions and thus it is our responsibility to take action and do so immediately,” she said at a meeting on tax policy and climate change.
The changes agreed to by the G-20 are designed to bring in more revenues for governments at a time when tackling the Covid-19 pandemic has driven up many countries’ debts. For some tax experts, the overhaul is fundamental because it opens the way to further rises in tax rates, and a greater shift of revenue toward countries in which consumers are based.
“I don’t think it’s a one-off,” said Rob Mander, global head of taxes at accounting and consulting firm RSM International. “I think it’s a steppingstone.”
Sitting alongside Ms. Yellen, French Finance Minister Bruno Le Maire hailed what he saw as a new willingness on the part of the U.S. to engage with other countries in tackling common problems. “There is one piece of very good news,” Mr. Le Maire said. “The U.S. is back in the fight against climate change.”
But differences over specific remedies suggested common action will remain difficult to agree upon. Mr. Le Maire called on the G-20 to agree to a minimum tax on carbon emissions, a proposal that didn’t get much support elsewhere.
“It is important to recognize that there are numerous policy levers and paths that countries will take to create incentives for decarbonization,” Ms. Yellen said.
Many of the measures needed to tackle climate change will have greater impacts on national economies and households than any change in the taxation of corporate profits.
While the European Union and Canada are using carbon taxes to meet their commitments to reduce emissions, other governments prefer different routes. They include big, publicly funded investment programs to make electricity generation and transport more energy efficient, which is the approach favored by the Biden administration.
So while the tax overhaul is a sign that some international cooperation is still possible at a time of intense geopolitical rivalry, similar advances on bigger problems will be more difficult to accomplish.
“I think the good news is that the tensions aren’t preventing agreement on things that are clearly win-win,” said Creon Butler, a former director for international economic affairs in the U.K.’s National Security Secretariat who now works for international affairs think tank Chatham House in London. “But when you get into climate change, it’s really different.”
The tax overhaul is also a reminder that, even if the G-20 can agree on something, that doesn’t mean all other countries are on board. Among those that reject the overhaul are Nigeria and Kenya, two of Africa’s most populous countries.
“When we look at the fairness of the deal, developing countries are not getting what they want,” said Tommaso Faccio, a lecturer in accounting at Nottingham University Business School and the head of the secretariat of the Independent Commission for the Reform of International Corporate Taxation.
Many developing countries want the minimum tax rate to be set higher than the 15% agreed by the G-20. Meanwhile, three European countries want it to be lower. And one of the greatest challenges to implementing the new rules could be navigating the deal through the U.S. Congress.
With Republicans objecting to tax increases, Democrats will need full support from within their ranks to enact the minimum corporate tax this year as a way to help pay for the Biden administration’s antipoverty programs.
It is far from certain whether the president’s full tax increases will get through. Business groups are urging the U.S. to wait for other countries to deliver their part of the global tax deal rather than move first.
Should Congress reject the deal, it would be a major blow to prospects for global cooperation on other issues, warned Adam Posen, president of the Peterson Institute for International Economics in Washington. He said that would be analogous to the U.S.’s refusal to join the League of Nations after President Woodrow Wilson had secured international backing to create the institution in the aftermath of World War I.
“It would be confirming the internal U.S. divisions and strong isolationist wing to the rest of the world,” Mr. Posen said.
Global Tax Deal Heads Down Perilous Path In Congress
Business groups urge delay as U.S. lawmakers prepare for complex two-step process.
A complex international corporate tax deal that took years to hammer out soon faces one of its toughest tests: the U.S. Congress.
The Group of 20 major economies backed the plan this weekend in Venice, Italy, following the earlier endorsement from a broader 130-country group. The plan, aimed at limiting corporate tax avoidance, would revamp longstanding international rules and is crucial to President Biden’s plans to raise corporate taxes.
“The world is ready to end the global race to the bottom on corporate taxation, and there’s broad consensus about how to do it,” Treasury Secretary Janet Yellen said.
As detailed negotiations continue, other countries will look to see if U.S. lawmakers implement a minimum corporate tax of at least 15% and embrace new rules for dividing the power to tax the largest companies.
Congress will stare back, monitoring how quickly other countries create minimum taxes and remove unilateral taxes on digital companies that have drawn bipartisan U.S. opposition.
“The rest of the world is very aware that the administration cannot bind Congress,” said Chip Harter, the Trump administration’s lead international tax negotiator, who is now at PwC LLP. “They are watching very closely.”
International negotiators split their work into two separate ideas, known as pillars. Pillar One, pushed by European countries including the U.K., would assign more taxing power to countries with large consumer markets and pull power away from low-tax jurisdictions such as Ireland.
Pillar Two, driven by the U.S., would impose at least a 15% tax on companies’ world-wide earnings.
Setting that floor makes it easier for the Biden administration to try raising taxes on U.S. companies by up to $2 trillion over a decade, because U.S. rates could rise higher without creating significant opportunities for companies to dodge taxes by shifting profits and addresses.
Both pillars present tricky legislative challenges. They likely will move separately through Congress, but the international consensus rests on pairing them and completing both tasks. Mr. Biden and Ms. Yellen emphasize the minimum tax, but other countries care more about getting the power to expand their corporate taxes.
They have imposed digital services taxes on technology companies such as Facebook Inc. and Alphabet Inc. —which they say aren’t paying enough corporate taxes—and will only give those up if they can tax those firms another way.
“The role of Congress will be very important, because if the rest of the world doesn’t think it’s going to get what it bargained for on [profit-allocation rules], then it will lose its appetite” for the rest of the deal, said Deloitte LLP’s Robert Stack, the Obama administration’s international tax negotiator.
The Biden administration will try to turn its drive for a tougher minimum tax into legislation this fall without Republican votes by using the budget reconciliation process that requires a simple Senate majority instead of the 60 votes needed for most bills.
The White House would then attempt to change the international rules, perhaps through a treaty requiring Republican support.
The administration’s international tax changes alone would raise about $1 trillion over a decade to help pay for policies such as an expanded child tax credit and renewable-energy tax breaks. That may be enough motivation for many Democrats.
“It’s easier to sell the notion of raising taxes on offshore earnings than it is to raise rates domestically,” said Manal Corwin of KPMG LLP, a former Obama administration Treasury official.
Business groups are urging the U.S. to wait. Their point: The U.S. imposed minimum taxes on U.S. companies in 2017, and other countries didn’t follow.
“Are we really going to do it again and increase our rates while we wait and see if they do something?” said Cathy Schultz, vice president for tax and fiscal policy at Business Roundtable, an association of large-company chief executives.
“The world is ready to end the global race to the bottom on corporate taxation, and there’s broad consensus about how to do it.”
— Treasury Secretary Janet Yellen
The 130-country agreement includes an important shift in how the world sees the existing U.S. minimum tax. Under the Trump administration, the U.S. pressed other countries to accept that 2017 tax as complying with any agreement. The Biden administration’s focus on tougher minimum taxes changed the U.S. negotiating position.
The existing U.S. tax is calculated globally, not for a company’s profits in each country, a feature that Treasury officials say lets companies benefit from profits in low-tax countries.
However, the new U.S.-backed deal says minimum taxes would be calculated on a country-by-country basis, making it harder for companies to reduce taxes by blending profits in high- and low-tax jurisdictions. Businesses oppose the country-by-country calculation as costly to comply with.
The agreement says “consideration will be given” to how the U.S. tax coexists with international rules instead of automatically making the U.S. minimum tax compliant. The agreement sets a minimum 15% tax rate and includes a mechanism to punish companies from countries without minimum taxes.
Those features are absent in current U.S. law, but they are in the Biden plan. That shift in U.S. posture—from seeking international acceptance of U.S. law to seeking changes in U.S. law—pressures Congress.
If U.S. law isn’t deemed compliant, American companies could face higher taxes abroad. But the agreement gives the U.S. some flexibility as the legislative process unfolds.
Most members of Congress have paid little attention to details of international talks, and Democrats may raise taxes without going as far as Treasury officials want.
At some point, Congress will turn to Pillar One, to give countries more power to tax companies that sell to their residents but don’t have much taxable presence there. That has been driven by European frustration at U.S.-based technology giants, which dominate their markets but funnel tax payments elsewhere.
Observers and congressional aides say Pillar One will require a treaty and thus a two-thirds vote in the evenly divided Senate, requiring Republican support. Crucial details remain unresolved internationally as further talks continue through October.
Ms. Yellen said Sunday that it could be ready for congressional consideration by spring 2022 and that officials would determine then what would be needed to implement it.
Senate GOP aides say they are waiting for information from the administration about how the deal affects U.S. companies and revenue. A senior Treasury official said the administration negotiated the deal with bipartisan support in mind, noting Republican backing for removing foreign countries’ digital taxes.
The administration says Pillar One will have little impact on revenue, because the U.S. would cede some taxing authority but gain power over companies selling to Americans.
If Pillar One raises too much money, it looks like a tax increase Republicans would oppose. If it loses too much revenue, it looks like a giveaway of the U.S. tax base. If much of the burden falls on U.S. companies, as early estimates suggest, that also may spur opposition from lawmakers.
Ultimately, a Pillar One agreement might require a nudge from U.S. multinational companies. Corporations may oppose the administration on the minimum tax but back Mr. Biden later, said Ben Koltun, director of research at Beacon Policy Advisors.
They could push Republicans to back the subsequent Pillar One deal, contending that it brings certainty and predictability to the international tax order, he said.
“The bet by the administration is the temperature will cool” before treaty consideration, Mr. Koltun said. “There are still plenty of pro-business Republicans.”
EU To Put On Hold Digital Levy Following G-20 Minimum Tax Plans
Digital tax delay is the latest step by the U.S. and the EU to improve economic relations.
The European Union is putting on hold a proposed digital levy, an EU spokesman said Monday, after finance chiefs from the Group of 20 leading economies endorsed an overhaul of the rules for taxing international companies.
The EU has faced intense U.S. pressure to postpone any announcement until a deal among the G-20 can advance. The EU’s executive arm, the European Commission, has “decided to put on hold our work on a proposal for a digital levy” until October, said the spokesman. A proposal was expected later this month.
The EU’s announcement came after U.S. Treasury Secretary Janet Yellen arrived in Brussels for meetings with EU finance ministers and Commission officials, where she is expected to discuss the tax deal and lobby against the proposed EU levy, which has been criticized as conflicting with the G-20 deal.
European officials had already indicated they would aim to ensure the EU’s digital levy wouldn’t undermine work on the global corporate minimum tax, indicating they would propose a low tax rate and structure it in a way to avoid discriminating against U.S. companies.
Still, by delaying the Commission’s proposal, the EU maintains some leverage if negotiations over how to implement the minimum corporate tax agreement fail.
A U.S. Treasury spokeswoman declined to comment on the EU announcement.
A number of EU members, including France, Austria, Italy and Spain have imposed their own digital services taxes, but some have agreed to withdraw them if the G-20 deal is implemented. In its turn, the U.S. imposed but suspended tariffs on imports from those countries, pending a final agreement.
A trans-Atlantic tax dispute remains possible.
While some of the EU’s 27 member states are reluctant to proceed with an EU levy, France is among the countries that support one, seeing it as a way to generate revenue for Brussels. With the European Commission issuing debt on a large scale to finance the bloc’s recovery plan, some member states are looking for new EU tax income to repay those obligations.
The digital tax delay is the latest step by the U.S. and the EU to improve economic relations, after a series of trade and tax rifts during the Trump administration.
Last month, when President Biden visited Brussels for a summit, the EU and the U.S. announced a truce on their long-running Boeing -Airbus trade dispute.
A number of other trade disputes remain unresolved, including over steel and aluminum tariffs, and the U.S. has already expressed wariness over EU plans for a carbon emissions border tax that could hit U.S. businesses.
Yellen Sees U.S. Companies Pushing To Back Global Tax Deal
Treasury Secretary Janet Yellen said U.S. companies are likely to provide crucial support in pushing lawmakers to back a global overhaul of corporate taxation, helping overcome Republican opposition that may slow or stop ratification of an accord endorsed by Group of 20 nations over the weekend.
“To the extent that the Republican side is going to be looking to business and trying to protect business interests, my guess is that businesses are going to be saying to members of Congress, please approve this,” Yellen said Tuesday in an interview in Brussels, as she wrapped up a week in Europe.
At the G-20 meeting of finance ministers and central bankers in Venice, attended by Yellen, nations put their stamp of approval on a preliminary pact that would revamp how countries tax multinational firms. The deal was also backed by 132 nations in talks led by the Organization for Economic Cooperation and Development. It faces challenges back in Washington, however, where the administration is counting on Congress to pass legislation to bring the U.S. fully in line with the agreement.
Yellen had made clear in Venice she hoped the minimum tax portion, also known as Pillar Two, would be included in a fast-track budget bill going to Congress later this year that doesn’t require Republican support.
But she emphasized in the interview that many multinational business leaders have come out in support of the deal because it could provides them with more certainty on tax rates and rules.
It’s unclear whether a two-thirds Senate vote will be needed on the part of the plan to divide up profit taxes on the biggest firms, making it much more difficult to pass. That part is known as Pillar One.
Yellen held out hope that Republicans would come on board, if necessary.
“A year or so from now if Pillar One comes along and needs some congressional action, I would not start with the assumption that it would be impossible to get that on a bipartisan basis,” she said in the interview.
The agreement would set a minimum tax rate of at least 15% in order to prevent companies from relocating to low-tax havens, and establish a system for sharing some of the profit taxes imposed on the very largest international companies based on where they operate and not where they’re headquartered.
Yellen has repeatedly emphasized the deal would help countries capture more tax revenue from big companies, and the Biden administration is counting on the global tax revamp to help support a $4 trillion, 10-year economic agenda in the U.S.
Leaders are hoping to finalize the deal in October at the G-20 summit in Rome. Getting to the finish line will require clearing a few significant hurdles, which Yellen sought to address on her trip.
She met with Irish Finance Minister Paschal Donohoe on Monday. The session didn’t produce any public results, but Yellen said her meetings with European partners were productive and went well. Ireland is one of the three European nations that have declined so far to sign on to the global tax accord.
“This is a real shift on how the world is going to cooperate to make sure capital income bears its fair share of paying for common needs,” she said. “I honestly feel this is an historic shift that we’ve agreed to.”
The Business Roundtable, a group representing chief executives of large U.S. companies, previously said in April that “any U.S. minimum tax should be aligned with” an agreed-upon global level. The global talks have backed a U.S. proposal for a rate of at least 15%, though the Biden administration is seeking a 21% rate for U.S. companies.
Grace Perez-Navarro, a top tax official at the OECD, made the case for why businesses should like this deal Tuesday at an Urban-Brookings Tax Policy Center virtual event.
“Tax certainty is a key part of this deal,” she said. Multinationals subject to the framework “will benefit from new dispute prevention and resolution mechanisms, which will avoid double taxation.”
A separate, unconnected problem also awaits Yellen when she arrives back in Washington on Tuesday evening, as the U.S. government once again creeps closer to the so-called debt ceiling.
If Congress doesn’t act before then, the current suspension of the debt limit is set to expire on July 31. It’s unclear how long the Treasury can cover government expenses, which ultimately could push the U.S. into default on maturing debt payments. Congress so far lacks a clear plan to raise it.
Yellen said she intends to write to Congress as the end of July approaches to advise lawmakers on how long Treasury could hold out, but didn’t want to speak ahead of that.
The Treasury Department declined to put on record Yellen’s comments on other topics.
Congress Unlikely To Ratify Global Tax Deal, Senator Says
A key U.S. lawmaker said Congress probably won’t ratify a global tax accord that world leaders aim to finalize by the end of October, potentially imperiling a deal aimed at reducing competition among governments with ever-lower corporate rates.
One half of the tax agreement is designed to help countries share the spoils from multinational firms like Facebook Inc. and Alphabet Inc.’s Google, and that part would require a treaty ratified by a two-thirds vote in the Senate, Republican Senator Patrick Toomey of Pennsylvania said Tuesday during a Senate Banking Committee hearing on Covid-19 relief.
“I think that’s unlikely to happen,” Toomey said of achieving such a supermajority. Democrats and Republicans are currently evenly split in the 100-member chamber.
Treasury Secretary Janet Yellen, the main U.S. official working toward the global accord, said under questioning from Toomey that a treaty would be one of “a number of ways” for Congress to implement the deal. Toomey made clear that he sees it as the only way.
“I want to stress, we have for many decades bilateral tax treaties,” Toomey said. “Changing those treaties requires ratification in the Senate — there’s no way around that that I can see.”
President Joe Biden has proposed higher taxes on corporations and high earners to pay for trillions of dollars in infrastructure and social spending, with legislation currently moving through Congress. The changes to global levies are a key portion of the tax proposals.
Group of 20 officials are aiming to finalize the agreement at a summit in late October. The Organization for Economic Cooperation and Development, which is overseeing the global talks among about 140 nations, says implementation would be possible as soon as 2023.
The other half of the tax agreement would establish a global minimum tax of at least 15% on corporate profits, and Democrats are looking to implement that portion with measures that require only a simple majority.
Despite Toomey’s assertion, Democrats may also still look for ways to implement the first part of the tax deal with a simple majority as well.
Swiss Likely Won’t Make Global Minimum Tax Deadline of 2023
Switzerland won’t be able to meet the implementation deadline of 2023 for the global minimum corporate tax, according to Finance Minister Ueli Maurer.
Switzerland has a federal system and its lawmaking process is at-time cumbersome.
Maurer told a conference in Bern that the Swiss would be informing their counterparts of the need for more time later this year and hoped to meet with understanding.
Group of 20 officials are aiming to finalize an agreement designed to help countries share the spoils from multinational firms like Facebook Inc. and Alphabet Inc.’s Google at a summit in late October.
The other half of the tax agreement would establish a global minimum tax of at least 15% on corporate profits. The Organization for Economic Cooperation and Development, which is overseeing the global talks among about 140 nations, says implementation would be possible as soon as 2023.
Spain Considers Corporate Tax Floor In Nod To Global Overhaul
The Spanish government is considering setting a minimum corporate tax rate of 15% next year, embracing a global initiative to standardize treatment of multinationals.
Prime Minister Pedro Sanchez’s Socialist party is inching closer to a deal with its junior partner, Unidas Podemos, to set a floor that would limit large companies from seeking too many tax credits, said two government officials familiar with the negotiations.
Podemos, a left-wing group repeatedly at odds with Sanchez over economic policy, has demanded the measure for the 2022 national budget as a condition of support for accompanying fiscal plans.
If that succeeds, Spain would become one of the first major economies to follow through on a global deal to revamp corporate taxes and end a race to the bottom in which governments offer ever-lower rates to lure international firms. By contrast, Ireland and a handful of other countries are resisting, potentially complicating the planned 2023 implementation of a preliminary accord brokered by the OECD.
“I don’t think Spain can afford to do this without the explicit approval from Brussels or a final OECD deal,” said Javier Diaz-Gimenez, professor of economics at IESE Business School in Madrid. “The risk is that you might drive investment away and end up with less tax collection.”
Spain currently taxes corporations at a rate of 25%, but it offers benefits that reduces the effective rate many companies pay.
Europe’s fourth-largest economy is one of over 130 countries and jurisdictions backing the plan to make multinational companies pay an effective minimum rate of at least 15%. Group of 20 leaders plan to meet in October to try to finalize the global tax deal.
Setting a 15% floor would not significantly change to the country’s tax framework, Economy Minister Nadia Calvino said in an interview with daily El Pais published on Sunday.
The government has asked a group of experts to deliver recommendations by February for an overhaul of the tax system. The revamp could further strain ties with business after clashes with the Sanchez administration over a minimum wage hike and a windfall tax on utilities to limit energy bills.
Corporate Taxes Poised To Rise After 136-Country Deal
The agreement seeks to set a global minimum tax, but officials see challenges in implementing the accord.
Nearly 140 countries agreed Friday to the most sweeping overhaul of global tax rules in a century, a move that aims to curtail tax avoidance by multinational corporations and raise additional tax revenue of as much as $150 billion annually.
But the accord, which is a decade in the making, now must be implemented by the signatories, a path that is likely to be far from smooth, including in a closely divided U.S. Congress.
The reform sets out a global minimum corporate tax of 15%, targeted at preventing companies from exploiting low-tax jurisdictions.
Treasury Secretary Janet Yellen said the floor set by the global minimum tax was a victory for the U.S. and its ability to raise money from companies. She urged Congress to move swiftly to enact the international tax proposals it has been debating, which would help pay for extending the expanded child tax credit and climate-change initiatives, among other policies.
“International tax policy making is a complex issue, but the arcane language of today’s agreement belies how simple and sweeping the stakes are: when this deal is enacted, Americans will find the global economy a much easier place to land a job, earn a living, or scale a business,” Ms. Yellen said.
The agreement among 136 countries also seeks to address the challenges posed by companies, particularly technology giants, that register the intellectual property that drives their profits anywhere in the world. As a result, many of those countries established operations in low-tax countries such as Ireland to reduce their tax bills.
The final deal gained the backing of Ireland, Estonia and Hungary, three members of the European Union that withheld their support for a preliminary agreement in July. But Nigeria, Kenya, Sri Lanka and Pakistan continued to reject the deal.
The new agreement, if implemented, would divide existing tax revenues in a way that favors countries where customers are based. The biggest countries, as well as the low-tax jurisdictions, must implement the agreement in order for it to meaningfully reduce tax avoidance.
Overall, the OECD estimates the new rules could give governments around the world additional revenue of $150 billion annually.
The final deal is expected to receive the backing of leaders from the Group of 20 leading economies when they meet in Rome at the end of this month. Thereafter, the signatories will have to change their national laws and amend international treaties to put the overhaul into practice.
The signatories set 2023 as a target for implementation, which tax experts said was an ambitious goal. And while the agreement would likely survive the failure of a small economy to pass new laws, it would be greatly weakened if a large economy—such as the U.S.—were to fail.
“We are all relying on all the bigger countries being able to move at roughly the same pace together,” said Irish Finance Minister Paschal Donohoe. “Were any big economy not to find itself in a position to implement the agreement, that would matter for the other countries. But that might not become apparent for a while.”
Congress’ work on the deal will be divided into two phases. The first, this year, will be to change the minimum tax on U.S. companies’ foreign income that the U.S. approved in 2017.
To comply with the agreement, Democrats intend to raise the rate—the House plan calls for 16.6%—and implement it on a country-by-country basis. Democrats can advance this on their own and they are trying to do so as part of President Biden’s broader policy agenda.
The second phase will be trickier, and the timing is less certain. That is where the U.S. would have to agree to the international deal changing the rules for where income is taxed. Many analysts say that would require a treaty, which would need a two-thirds vote in the Senate and thus some support from Republicans. Ms. Yellen has been more circumspect about the schedule and procedural details of the second phase.
Friction between European countries and the U.S. over the taxation of U.S. tech giants has threatened to trigger a trade war.
In long-running talks about new international tax rules, European officials have argued U.S. tech giants should pay more tax in Europe, and they fought for a system that would reallocate taxing rights on some digital products from countries where the product is produced to where it is consumed.
The U.S., however, resisted. A number of European governments introduced their own taxes on digital services. The U.S. then threatened to respond with new tariffs on imports from Europe.
The compromise was to reallocate taxing rights on all big companies that are above a certain profit threshold.
Under the agreement reached Friday, governments pledged not to introduce any new levies and said they would ultimately withdraw any that are in place. But the timetable for doing that has yet to be settled through bilateral discussions between the U.S. and those countries that have introduced the new levies.
Even though they will likely have to pay more tax after the overhaul, technology companies have long backed efforts to secure an international agreement, which they see as a way to avoid a chaotic network of national levies that threatened to tax the same profit multiple times.
The Organization for Economic Cooperation and Development, which has been guiding the tax talks, estimates that some $125 billion in existing tax revenues would be divided among countries in a new way.
Those new rules would be applied to companies with global turnover of €20 billion (about $23 billion) or more, and with a profit margin of 10% or more. That group is likely to include around 100 companies. Governments have agreed to reallocate the taxing rights to a quarter of the profits of each of those companies above 10%.
The agreement announced Friday specifies that its revenue and profitability thresholds for reallocating taxing rights could also apply to a part of a larger company if that segment is reported in its financial accounts.
Such a provision would apply to Amazon.com Inc.’s cloud division, Amazon Web Services, even though Amazon as a whole isn’t profitable enough to qualify because of its low-margin e-commerce business.
The other part of the agreement sets a minimum tax rate of 15% on the profits made by large companies. Smaller companies, with revenues of less than $750 million, are exempted because they don’t typically have international operations and can’t therefore take advantage of the loopholes that big multinational companies have benefited from.
Low-tax countries such as Ireland will see an overall decline in revenues. Developing countries are least happy with the final deal, having pushed for both a higher minimum tax rate and the reallocation of a greater share of the profits of the largest companies.
Global Corporate-Tax Overhaul Advances As 136 Nations Sign On
A vast overhaul of corporate taxation won support from 136 countries, as governments resolved key differences over the level of a global minimum rate and an end to new digital taxes that the U.S. has deemed discriminatory.
After years of missed deadlines and wrangling over how to handle tech firms such as Facebook Inc. and Alphabet Inc.’s Google, Friday’s deal included a 15% minimum rate for corporations and the main parameters of how much profits of the 100 or so biggest multinationals would be taxed in more countries: 25% of profits over a 10% margin.
The deal moves a step closer to ending what U.S. Treasury Secretary Janet Yellen calls a global “race to the bottom” among countries luring companies with ever-lower tax rates.
The Group of 20 looks to approve the plans at meetings of finance officials next week and a summit at the end of the month. The Organization for Economic Cooperation and Development, which has chaired the talks, is aiming for a multilateral convention next year and implementation in 2023. That could still prove ambitious in some countries, not least the U.S.
The OECD said a minimum rate could ultimately raise government incomes by $150 billion a year, while new rules would reallocate $125 billion of profits to be taxed in nations where big corporations generate revenue but may have little physical presence.
Parties to the deal include all members of the Group of 20, European Union and OECD, the Paris-based organization announced Friday.
In addition, countries agreed not to impose new digital services taxes as of Friday, though the deal didn’t include specifics on when existing levies will be repealed.
Friday’s agreement marks a victory for global negotiations that almost ground to a halt during Donald Trump’s presidency and spiraled into trade tensions with unilateral measures and threats of retaliatory tariffs. A final deal would offer the promise of new revenues for governments facing huge debt burdens after the Covid-19 pandemic.
“The alternative to this happening is that we see the growth of unilateral tax measures, we see the slow erosion of our global tax architecture,” Irish Finance Minister Paschal Donohoe, whose government made a crucial last-minute concession to sign up to the deal, told Bloomberg Television on Friday before the OECD announcement. “All of those things would bring additional risks, additional instability.”
The latest accord builds on a preliminary July deal, when governments agreed on key aspects of the plan for the first time — including which companies would be subject to the profit reallocation rules.
The years-long talks at the OECD are split into two so-called pillars. The first deals with questions of allocating profits for tax, while Pillar Two seeks to create a global minimum corporate tax rate.
Of the countries involved in the talks, Kenya, Nigeria, Pakistan, and Sri Lanka haven’t signed the deal, the OECD said.
The accord “is a raw deal for developing countries” who will get “next to nothing in extra direct revenue from this agreement,” Didier Jacobs, tax policy lead for poverty-fighting group Oxfam America, said in a statement.
Global Tax Reform Isn’t Yet A Done Deal
Ireland’s backing clears the way for the reforms to be enacted in Europe, but uncertainty is growing about Washington’s ability to finish the job.
Europe has mustered an almost united front behind global tax reform. Now it is the U.S. that needs to get its house in order.
On Friday evening in Paris, about 130 nations are expected to announce a new deal on global corporate taxation. Key holdout Ireland said it would back the deal late Thursday.
Its support was crucial because the country has a low tax rate and hosts the international headquarters of many U.S. tech giants at the heart of the tax-avoidance quarrel.
Dublin also could have blocked European Union implementation of the deal—any change to the bloc’s tax rules requires unanimous approval. Other EU holdouts, Hungary and Estonia, may extract some concessions, but are now expected to fall in line.
The Biden administration has been a key advocate of the agreement, and has worked hard and twisted a few arms to get one. But the required tax changes are mostly tucked into the White House’s contentious $3.5 trillion spending bill.
While legislating new U.S. tax rules was never going to be easy, the obstacles seem to have grown in recent weeks and failure could feasibly trip up the global overhaul.
Getting here has taken years. The final agreement will be similar to the preliminary one agreed to in July, but it will get into the thornier issues glossed over in the summer accord. The reform makes two big changes.
First, it creates a global minimum corporate tax. Second, it will tax the world’s largest companies slightly differently: A percentage of their profits will be taxed based on where they make sales rather than where they have assets such as factories, employees or patents. Currently asset location determines taxing rights.
Three points of disagreement have been worked through over the summer. First, the minimum tax rate is expected to be 15%. Prior drafts said at least 15%, but Dublin pushed hard for this change—its longstanding rate is 12.5%.
Second, about a quarter of residual profits will likely be taxed using sales rather than assets. French officials said earlier this week there was broad backing for that rate, although some developing nations wanted a higher percentage.
They may have compromised in exchange for avoiding arbitration to resolve disputes, which many worried could disadvantage them or impinge their sovereignty.
Third, Washington’s pet issue: the rollback of digital service taxes (DSTs). Countries around the globe have used DSTs to target U.S. tech giants that pay little or no local corporate tax on profits made locally.
Governments also intended DSTs to bring the U.S. to the negotiating table—which they eventually did—and many promised to reverse them once global reform was done. Washington wants DSTs removed now that a deal is agreed, but others prefer to wait until tax rules are updated. These two dates could be years apart.
Recent drafts included implementation of the deal by sometime in 2023. With Dublin on board, the timing seems ambitious but possible for Europe.
President Biden’s path seems less certain. The final agreement on when to roll back the DSTs will offer a useful indication of how confident Europeans and Americans are that this reform is a done deal.
U.S., European Nations Claim Progress On Path To Removing Digital Taxes
French finance minister says five European countries agree on how they will remove digital taxes once a global agreement is in force.
The U.S. and five European countries have reached an agreement on how those countries’ digital-service taxes would be withdrawn as a broader international agreement moves forward, French Finance Minister Bruno Le Maire said on Thursday.
The deal isn’t likely to yield an immediate withdrawal of those taxes because it is still linked to the broader global tax agreement being completed and implemented over the next few years. But having a path forward could ease tensions between the U.S. and France, Italy, the U.K., Austria and Spain.
“That’s good news,” Mr. Le Maire told reporters. “We came to an agreement during these two days in Washington about the way in which we will withdraw” those taxes.
Alexandra LaManna, a U.S. Treasury Department spokeswoman, confirmed an agreement had been reached and said more details are expected to emerge in the coming days.
“This agreement should put an end to tax and trade disputes with our European allies that could hamper economic growth and business investment, and stop unilateral measures to pave the way for implementation of the 136-nation agreement,” she said.
Most of the U.S. attention in the 136-country tax deal reached last week focused on the global minimum tax that is a priority for Treasury Secretary Janet Yellen and the Biden administration.
But other nations, including France, the U.K. and Italy, have been keenly focused on the other half of the deal, which gives countries more ability to levy their corporate income taxes on companies that sell to their customers without a significant physical presence. It is partly aimed at increasing the taxes that companies such as Facebook Inc. and Alphabet Inc. pay outside the U.S.
Countries have been imposing digital taxes outside the corporate income tax as a way to tax those companies. The deal reached last week would expand the taxing powers of countries based on the size of their consumer markets, even if they aren’t typical profit centers or corporate headquarters. In exchange, countries would have to give up their digital taxes.
The U.S., through both the Trump and Biden administrations, has opposed other countries’ digital taxes as unfair and discriminatorily aimed at an industry dominated by American companies. It has imposed retaliatory tariffs but has suspended enforcement as negotiations have continued.
U.S. officials have pressed for the digital taxes’ removal as part of a broader agreement about which countries get to tax which companies’ profits. The challenge is figuring out when that happens.
The U.S. has urged quick removal of the taxes, but European countries have resisted. The statements from France and the U.S. on Thursday don’t offer full clarity on exactly what will happen, though Mr. Le Maire reiterated that France won’t remove its digital tax until the new tax is in force.
Daniele Franco, the Italian finance minister who was speaking for the G-20 presidency, didn’t suggest much movement soon.
“By the end of 2023 or the beginning of 2024 the [rules] will be operational, and the agreement is that, at that point, the national taxes will be removed,” Mr. Franco said. “Since the beginning, it has been established that the taxes would be removed when a world-wide solution would be implemented. So we expect national, unilateral taxes to be removed by 2024.”
The resolution of tensions between France and the Biden administration won’t necessarily create bipartisan goodwill.
“Countries with DSTs should demonstrate their good faith and suspend collection of the tax while the OECD process is completed,” Rep. Kevin Brady (R., Texas), the top Republican on the House Ways and Means Committee, said earlier this week.
Business groups have also been insistent on a faster removal.
One challenge in the stare-down with the U.S. stems from the system that would replace the digital taxes. The new rules would let countries apply their corporate income taxes to companies based partly on where customers are located, instead of solely where corporate value is created.
That is a shift sought by countries such as the U.K., Italy and Spain, which have been frustrated to see technology giants earning profits off their citizens without paying significant corporate income taxes.
The international agreement calls for a multilateral framework to implement those changes, which would upend the network of tax treaties and other rules that have governed the international tax system for decades. The power to tax the largest multinational companies would be replaced by a new formula.
Such an agreement would likely need to go through the U.S. Congress, and Republicans contend that it would require a treaty and thus two-thirds approval in the Senate. That would require the support of at least 17 Republicans in the current alignment.
Other countries are well aware of the potential hurdles that the Biden administration would face in getting those votes.
In a letter last week, three senior Senate Republicans said they were concerned by recent suggestions that the administration thought it could implement the changes without changing tax treaties that had been ratified by two-thirds of the Senate.
“Bypassing this process to override our bilateral tax treaties would irreparably erode the exclusive treaty authority the Constitution provides to the Senate,” wrote Republican Sens. Jim Risch and Mike Crapo of Idaho and Pat Toomey of Pennsylvania.
The Biden administration has been more circumspect about the legislative path forward, hinting that there may be ways to implement the agreement without a treaty. No action on this in the U.S. is expected until next year.
Tying the digital-tax removal to the adoption of the multilateral deal could help the administration push the plan through Congress by offering Republicans a reason to back the deal, said Daniel Bunn, vice president of global projects at the Tax Foundation, a Washington group that generally favors simpler taxes with lower rates.
But Republicans, he said, will also be concerned about just how much of the U.S. tax base they would be ceding in the broader agreement.
Hans Vijlbrief, the minister of taxation for the Netherlands, which doesn’t have a digital tax, said other countries know that the changes in dividing up taxing authority are the most politically challenging for the U.S. and are watching the legislative process.
“It’s not that we don’t trust Capitol Hill, but there are other interests there,” Mr. Vijlbrief said in an interview Wednesday. “I would say that the U.S. is good for its word. If they promise that they will do this, I take it as a position that they will do this.”
France Says U.S. Must Drop Tariffs Threat Over Digital Taxes
French Finance Minister Bruno Le Maire said the U.S. must drop trade tariffs against European countries over digital levies after all sides joined a global agreement on overhauling international taxation.
Speaking to Bloomberg Television in Washington, Le Maire said he has made a political commitment to Treasury Secretary Janet Yellen to abolish France’s levy on digital firms as soon as the new rules on sharing rights to tax profits of multinationals come into effect.
The Organization for Economic Cooperation and Development, which oversaw the global negotiations, has said it aims for implementation of the deal as soon as 2023.
Other European countries have made similar commitments to France’s, yet the U.S. has not offered a guarantee it will drop its threat to retaliate against national levies, Le Maire said. Tariffs against several European countries, including France, are currently suspended.
“If we commit to withdraw our national taxation there must be a commitment from the U.S. administration to withdraw their tariffs on France and all European countries,” Le Maire told Bloomberg’s Annmarie Hordern. “That is the best way of building a constructive relationship and a friendly relationship between the two countries.”
Treasury Department spokeswoman Alexandra LaManna said the U.S. had reached a “political agreement” with all European countries on existing digital levies “regarding transition mechanisms for the rollback of those taxes.”
“This agreement should put an end to tax and trade disputes with our European allies,” she said. Details of the agreements would be made public in “coming days,” she said.
A New Way To Tax Global Corporations, Explained
Years of negotiations have produced an agreement to overhaul the global tax system in ways that will change where and how some of the world’s largest companies are taxed. Getting almost 140 nations on board was a huge breakthrough, but the fight isn’t over.
1. What Are The Highlights Of The Deal?
For the first time, there would be a minimum corporate tax rate applied around the world, set at 15%, so companies have less incentive to move their operations to low-tax jurisdictions. The profits of about 100 of the biggest multinational corporations would be sliced differently for taxation purposes, so that more countries share in the tax revenue. And there would be a rollback of the so-called digital service taxes that the U.S. has deemed discriminatory, plus an end to new ones.
2. Who Has Signed On?
The Group of 20 nations — which represent about 90% of the global economy — finalized key details in October. So far, 136 countries have signed on, out of 140 countries involved in negotiations overseen by the Organization for Economic Cooperation and Development, with Kenya, Nigeria, Pakistan, and Sri Lanka holding out. Crucially, those now on board include Ireland and Hungary, which until now have benefited from having some of the lowest corporate tax rates in Europe. Another European holdout, Estonia, has also signed on.
3. How Would The Global Minimum Tax Work?
Countries would apply the minimum tax to nearly any multinational company making more than 750 million euros ($870 million), though some kinds of income will be exempt from that calculation. Primarily, the rules will allow a country where a company is headquartered — call it Country A — to “top up” its taxation of the company if it’s paying less than 15% in Country B. For example, if the company is effectively paying a 12.5% tax in Country B, Country A can collect the extra 2.5%. There is also a backstop in the rules for when countries don’t apply the minimum tax.
4. How Would The Tax Reallocation Work?
It would affect multinationals that make more than 20 billion euros a year in revenue and have a profit margin above 10%, exempting companies in financial services and extractive industries such as mining. They won’t necessarily pay more tax; rather, the taxes they pay would be divided among more places. This change will target about 100 of the world’s largest and most successful multinationals, including companies such as Amazon, Facebook and Google that can sell their digital products into countries without establishing the physical presence that creates the basis for corporate income tax. Under the new system, countries where those companies have consumers or users would get the right to tax 25% of profits exceeding a 10% margin — and companies would be compensated for the tax they’re paying in additional locations by the countries where they’re currently paying it. Critically, countries also agreed to immediately halt all new digital tax measures. The freeze will last until the end of 2023, or whenever a convention implementing the reallocation goes into effect. Countries will also have to give up existing digital taxes.
5. Why Is A Resolution On Digital Taxes So Important?
Seeing an end to digital taxes has been a key aim throughout the negotiations for the U.S., which labels the measures as discriminatory against its own companies. Some nations have imposed these taxes on local sales of companies such as Facebook, Amazon and Google — grabbing a bigger share of the pie. France led the way with a tax on tech giants’ revenues, and other countries have followed. The U.S. now has retaliatory trade measures against Austria, India, Italy, Spain, Turkey, and the U.K. that are on pause until an end-of-November deadline. The OECD has warned that a cascade of trade retaliations could bite into a full 1% of world gross domestic product.
6. What’s Wrong With The Current System?
U.S. Treasury Secretary Janet Yellen said the goal of the proposed global minimum rate is to end a “30-year race to the bottom on corporate tax rates.” The “legal and not-so-legal” use of tax havens costs governments $500 billion to $600 billion in lost corporate tax revenue each year, according to estimates cited by the International Monetary Fund. Some governments have also argued that tech giants aren’t being properly taxed in countries where they have users. And many countries, particularly in the developing world, say the current system of global tax rules and agreements concentrates corporate profits in richer countries, giving developing countries too small a slice of the pie.
7. What Happens Next?
The October deal settled most of the major political battles, but technical details remain to be solved — including clarification on determining which countries will give up the revenues that are reallocated. In the meantime, implementation moves ahead on two tracks. Adopting the global minimum tax is a country-by-country decision. The European Union will look to pass a directive requiring all 27 member states to pass legislation enacting it. To implement the new way to distribute taxes paid by multinationals, the OECD will produce a kind of super-treaty for countries to sign and ratify. At what point the treaty would take effect is still to be decided. A big question is what the U.S. will do, and ratification by the U.S. Congress could be a do-or-die issue for the treaty.
8. What’s The Situation In The U.S.?
Yellen, who played a major role in brokering the global deal, must sell Congress on legislative changes to the U.S.’s own global minimum tax in line with the new rules. Lawmakers may also have to sign off on the global reallocation plan — possibly through changes to tax treaties, which go through the Senate, though there’s been hints that Treasury may look for an alternate route. Many Republicans have already signaled they’re unlikely to go along.
Democrats Bet On Raising Taxes on High-Income People, Big Businesses
Push is viewed broadly within party as political asset, based on opinion polls, but GOP sees it as overreach.
Many Democrats are willing—even eager—to enact tax increases on high-income households and big businesses and campaign on them in next year’s midterm elections, embracing a stance that the party has struggled with in the past.
Although Democrats’ slim majorities have forced them to abandon some of their most sweeping tax proposals, President Biden and congressional Democrats are still seeking to raise about $2 trillion over a decade from businesses and high-income households.
Democrats say their focus on the top tier of households would help combat growing wealth inequality. The money would help pay for the healthcare, education and climate-change programs that Democrats hope to pass in the coming months.
The House’s proposed tax increases would be the largest since 1968 on their own and the largest since 1990 after subtracting tax cuts also included in the plan.
This push for higher corporate taxes and higher rates for top earners—with a Biden pledge that no household making less than $400,000 will see a tax increase—is viewed broadly within the party as a political asset, not a liability.
Individual Democrats highlight different pieces of the overall agenda, but even some of the most conservative members, such as Sen. Joe Manchin (D., W.Va.), back significant tax increases that reverse some of the Republican tax cuts from 2017.
Still, raising taxes during a bumpy economic recovery is no sure bet, especially after federal revenues jumped 18% in fiscal 2021. Republicans, opposed to higher taxes for decades, frequently argue that Democrats’ plans would hamper economic growth and allow reckless spending.
They see the planned tax increases as an opportunity to recapture higher-income suburban voters who voted for Democrats in opposition to former President Donald Trump.
The Democratic outlook represents a shift from the start of the last two Democratic administrations, when the party was on the defensive in the 1994 and 2010 elections after lawmakers passed tax increases as part of economic and healthcare laws.
In 2010, Democrats put off a decision on whether to extend President George W. Bush’s tax cuts until after the midterms in part to avoid making taxes a bigger electoral issue. After losing seats in the election, they extended them all for two years.
This time, the push comes after Mr. Biden campaigned in 2020 on using tax increases on the wealthy and businesses to pay for an expansive social agenda. Democrats point to opinion polls to argue that voters support their plans to reverse some of Mr. Trump’s tax cuts—which lowered the corporate tax rate, shrank the estate tax and reduced taxes for business owners—and impose other new increases.
A Pew Research poll released in September found that 66% of Americans said tax rates on large businesses and corporations should be raised a lot or a little, compared with about 33% who said they should be lowered or kept the same.
The same poll found 61% said households making more than $400,000 should see taxes raised a lot or a little, compared with 37% who said they should be reduced or stay the same.
“It used to be that any conversation about taxes, the political consultants say to Democrats, don’t go there,” said Senate Finance Committee Chairman Ron Wyden (D., Ore.), who was first elected to Congress in 1980.
Now, when Mr. Wyden talks about a proposal to dramatically change taxes, like an annual tax on billionaires’ unrealized capital gains, “People say, of course, how come that wasn’t done a long time ago?” he said.
Republicans, preparing to challenge narrow Democratic majorities in the House and the Senate, view Mr. Biden’s tax agenda as an overreach that will lead to inflation and recession.
And they point to analyses showing that people making less than $400,000 would see increases on tobacco taxes and would be hurt by the effects of corporate taxes on Americans’ retirement accounts and jobs.
“Democrats, I think, have a blind spot when it comes to tax increases, that somehow they can rationalize or justify it in a way that this is not going to affect you, but in the end it does, and I think most people have figured that out,” said Sen. John Thune (R., S.D.).
Mr. Trump made bashing Democrats’ tax plans a key part of his pitch during a rally in Iowa last week, calling the healthcare, education and climate proposal a “sinister combination of job-killing tax hikes and woke fascism.”
Mr. Biden and his advisers believe that raising taxes on the rich and American corporations is a popular solution that fits the times. The president frequently says that billionaires dramatically increased their wealth during the pandemic and that many working Americans pay higher tax rates than the wealthy.
“It’s about changing the paradigm so the economy works for you, not just for those at the very top,” Mr. Biden said last week during an event in Michigan.
Democrats are still negotiating the details of the social-policy and climate proposal that includes the tax increases and are expected to reduce its size. That plan is separate from a roughly $1 trillion infrastructure bill that is also moving through Congress.
The tax proposals could change, too. The most recent version called for raising taxes on corporations’ domestic and foreign income, on closely held businesses, capital gains, high-income individuals and estates. It also would nearly double the size of the Internal Revenue Service.
Mr. Biden called for raising the corporate tax rate to 28% from 21%, but Mr. Manchin and some other lawmakers have said they prefer a 25% rate. Because of Democrats’ slim majorities in Congress, any senator or a handful of House members could prevent a tax increase from happening.
Parochial politics matter, too. New Jersey Democrats back higher taxes on the rich—but they also want Congress to remove a cap on the state and local deduction that benefits the wealthy. Rural Democrats, meanwhile, have resisted Mr. Biden’s capital-gains tax proposals and forced them to be scaled back.
Progressive Democrats embrace tax increases as a way to make the system more fair. Other lawmakers defend the plans by pointing to the need to limit the spending package’s impact on the budget deficit or focus on touting the many programs that the increases would finance.
Sen. Chris Coons (D., Del.), a close Biden ally, said paying for programs is important in selling them. Sen. Raphael Warnock (D., Ga.), who faces re-election next year in a state that typically elects Republicans, emphasized Democrats’ proposal to extend the expanded child tax credit.
“What is being missed too often is that we’re cutting a lot of taxes,” Mr. Warnock said.
Democratic strategists say voters’ views on higher taxes for the wealthy have changed since Walter Mondale was punished in the 1984 presidential election for openly advocating for tax increases on a broad group of Americans and President George H.W. Bush lost his re-election bid in 1992 after violating his “read my lips” pledge not to raise taxes.
“If they want to win the tax fight, it really comes down to one word: Fairness,” said Tad Devine, a longtime Democratic strategist who advised Sen. Bernie Sanders’s 2016 presidential campaign.
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