What’s in Biden’s global corporation tax proposals?

Finance ministers from the G20 group of the world’s biggest economies are moving a step closer to imposing a global minimum tax on multinational companies, potentially ending years of political wrangling on how to achieve a universal approach to dealing with corporate tax avoidance.

But what does the plan entail?

US president Joe Biden’s administration recently proposed a universal model for taxing global companies based on their volume of sales. The logic is simple: it is much easier to shift profits around than sales, so taxing sales makes it easier to correctly calculate a company’s actual liabilities.

It may seem a little out of character for the US to suggest a minimum rate of global corporation tax. But Biden’s administration is seeking to raise corporate taxes back up to 28% to fund its infrastructure proposal “The Build Back Better Plan” totalling $2trn. And part of the reasoning behind the plan is to prevent arbitrage by US companies who can move their operations between jurisdictions to benefit from lower taxes.

What the US is proposing

The Organisation for Economic Co-operation and Development (OECD) is currently talking tax. The first round of discussions revolves around establishing a new regime for taxing the biggest multinationals, while the second aims to establish a global minimum tax rate, which the US believes should be 21%.

The proposal, which applies to any sector (but will inevitably hit the big tech companies the hardest), is targeted at only the biggest and most profitable firms, and is likely to affect about 100 companies.

Biden has said that he wants to obtain bipartisan approval at home for his infrastructure plan, so it will probably take a few months for it to be approved. And, while he may not be able to raise US corporation tax to 28%, he could persuade politicians to settle on a rate of 25%, Reuters reports. That’s the same level as the international average corporate tax rate, estimates the right-leaning think tank, Tax Foundation.

The finer details of the deal are expected to be unveiled by summer. The US has shared its ideas with 135 countries involved in the negotiations, says the Financial Times, and Pascal Saint Amans, the OECD’s director for the centre of tax policy and administration, has already come out in favour, calling it “very positive” with “a chance to succeed in both the [international negotiations] and US Congress”, says the FT.

The OECD talks are significant because it could pave the way for the US to raise taxes on US firms without fear that they will shop around and find better deals elsewhere. Smaller countries such as Ireland, which has long wooed business from multinationals because of its low corporate tax regime, are unlikely to be in favour.

But the UK chancellor, Rishi Sunak – a staunch advocate of lower corporate taxes during the pandemic – now plans to raise the UK’s corporation tax in line with the peer group average.

Why Big tech will be the biggest loser

The creation of a global corporate tax rate could also help ease trade tensions between the US and a number of countries at a delicate time, particularly given tensions over the power of Big Tech.

The UK and a number of other countries, including France and Italy, have imposed or have threatened to impose, various digital sales taxes on US tech firms who do billions of dollars’ worth of business in their countries but pay pennies in tax. In retaliation, the US recently threatened to impose tariffs on $325m-worth of UK goods.

The world’s richest man, Amazon founder Jeff Bezos, has already backed Biden’s proposal, even although the likes of Facebook, Microsoft, Amazon, Amazon and Alphabet will bear the brunt. That said, given their powerful positions, they will almost certainly be capable of passing on higher costs to consumers, so a global corporate tax could also be inflationary.

Tech stocks are looking overpriced as it is, so it is hard to find any good reason to continue buying them. So, our view remains largely the same: the “Great Rotation” from high-flying tech stocks to the beaten-up value stocks of the last decade will accelerate even more if a global tax – currently just a pipe dream – becomes official.