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The world’s biggest corporations have been in the crosshairs of governments, regulators and activists for years. The reasons could be as varied as high executive pay, corruption, environmental damage and corporate governance missteps.
When it comes to corporate taxation, the opinion has been a divided one. Companies obviously want to be lightly taxed or better still not at all. Activists have railed at the fact that companies are raking in billions of dollars in profits from their worldwide operations but pay very little back to society by way of tax. Governments have been divided in opinion, wanting to attract investments, or even companies to domicile in their countries, or create employment opportunities.
The US has some of the largest and richest corporations in the world but their lobbying efforts and the country’s own desire to support companies has meant that they pay relatively lower tax on their profits. It even gives them special concessions on their global profits, ostensibly in a bid to support their spread in countries across the world to dominate the world of business.
But that has changed now. The new US Treasury secretary Janet Yellen has called not just for a higher US tax rate, but for a global minimum corporate tax rate. If only US taxes were to be hiked then companies would move to other countries that have friendlier tax policies. After all, Ireland’s low taxes is one of the main attractions for US tech majors investing in the country.
The Joe Biden administration wants US tax revenue to increase and while the immediate requirement is to fund the government’s massive infrastructure investment plan, the change will be a permanent shift in the tax structure for US multinationals. For now, the US government is proposing a tax increase from 21percent to 28percent and then also tax at a higher rate the overseas profits earned by US corporations.
But that’s not all. We are accustomed to hearing about the Minimum Alternate Tax imposed on the book profits of the company. This charge arises usually due to differences in how profits are calculated as per company law rules and according to income tax law. The US wants to impose a similar tax, apart from an increase in the basic tax rate, at the rate of 15percent.
If the US moves alone on this front, it risks US companies losing their competitiveness with rivals. That’s why it’s pushing this proposal among the OECD countries (that have been contemplating such a move even earlier) and also mentioned it at the G20 meeting of finance ministers. That will bring in more countries into the fold.
But why should other countries co-operate with the US, when earlier it did not pay much heed to their requests to co-operate on the taxation front? Its size and negotiation powers could help as also some counter-measures that it can take, as visible on the trade front. But it is also planning a juicy carrot, as reported by the FT in US offers new plan in global corporate tax talks (free to read for Pro subscribers). It has proposed that global companies should pay taxes in countries based on their income earned over there. It will be hoping to get governments to co-operate with its tax hike proposal in return.
Does this mean that global corporations are headed for paying higher taxes? In Three questions about Janet Yellen’s Global Minimum Corporate Income Tax published in today’s edition, we look at some key aspects surrounding this proposal, and address the most important question of whether tax saving mechanisms will go away if the US proposal succeeds. Do read to know more on an issue that is likely to be a very important factor for investors in the coming years.
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