Disclaimer: This blog post solely reflects the opinion of the authors and should not be taken to represent the general views of IPPR’s management/ editorial team or those of fellow authors.
Since being elected President of the United States of America in January of this year, Joe Biden has pursued a markedly more radical policy agenda than most observers had hitherto envisaged. What implications do his proposals for global tax reforms have on international commerce, what challenges do they face, and are they feasible?
Before discussing the proposals outlined in the plan, it’s helpful to understand the current tax climate for American multinational corporations. Under current rules, multinational corporations are able to pay an effective rate of 7.8% tax on their foreign earnings, with many not paying at all. Donald Trump’s 2017 tax plan, the Tax Cut and Jobs Act (TCJA) made some provisions to capture some of this lost revenue. These included a levy on global intangible low-taxed income (GILTI), that is, profits made in foreign countries; a base erosion and anti-abuse tax (BEAT), which attempted to prevent profit shifting abroad; and tax deductions for foreign-derived intangible income (FDII), that was configured to encourage more production in the USA. However, Biden claims that these proposals have failed to address the issue in a meaningful way and proposes a system overhaul to better address this issue. The centrepiece of which is a global minimum tax rate on US profits earned abroad (Davison and Gottlieb, 2021).
The Biden administration’s ‘Made in America’ tax plan implements several corporate tax reforms that address profit shifting and offshoring incentives and aim to level the playing field between domestic and foreign corporations. The proposal includes: Strengthening the global minimum tax for U.S. multinational corporations to 21% for OECD nations; reducing incentives for foreign jurisdictions to maintain ultra-low corporate tax rates by encouraging global adoption of robust minimum taxes; enacting a 15 per cent minimum tax on book income of large companies that report high profits, but have little taxable income; ramping up enforcement to address corporate tax avoidance. (U.S. Department of the Treasury, 2021)
According to projections calculated by the Urban-Brookings Tax Policy Centre, the proposed changes could raise approximately $442.1 billion over the next decade (Mermin et al, 2020). Alongside $727 billion raised from a domestic corporation tax increase from 21% to 28%, and a further $85 billion from planned changes to regulations to make it harder for multinationals to avoid US taxes, the Biden administration counting on this revenue to help fund a landmark $2.25 trillion infrastructure package (Davison and Gottlieb, 2021).
A global minimum tax rate of 21% would attempt to combat a ‘race to the bottom’, whereby countries lower their corporation tax rates to become more attractive to multinational corporations. Countries that attempt to move some of their operations to lower tax jurisdictions would be required to pay the difference. Yet, such measures would be almost impossible to agree and enforce. Despite this, setting a global standard and incentivising countries to follow while beginning the steps to monitor compliance would represent the first steps in moving toward uniform efforts across the OECD to tackle profit shifting. This may ultimately result in the implementation of a ‘global tax rate’, albeit one that is likely to be established at a lower rate than Biden’s plan has initially proposed (Julius, 2021).
The plan would seek to scrap some existing exemptions and tax breaks, such as one that currently allows U.S companies to pay no tax on the first 10% of income from overseas investments (Reuters, 2021). The plans would also propose eliminating tax breaks on foreign income derived from intangible assets such as software, trademark royalties, intellectual property licenses on technology, pharmaceuticals and other products. These currently incur a tax rate of around 13%, far less than the proposed 21%. The Biden administration hopes that these measures will help counteract the flow of investment and jobs overseas and afford some protection to the growth of American industry (ibid).
The plan would go some way towards diffusing public anger at foreign multinational companies with an enormous presence and market in host countries but pay little to no taxes there (Julius, 2021). Biden’s plan proposes a special 15% minimum on the book income of these largest corporations to ensure they cannot use tax loopholes or any legal wrangling to eliminate or mitigate their tax liability (Reuters, 2021). These circumstances have led some countries, such as France and the UK, to propose unilateral measures such as a digital services tax. The Biden plan looks to instead focus on large companies across all sectors through a multilateral sales-based approach, being easier to administer and fairer as it accounts for countries with strengths in different (non-digital) areas (Julius, 2021).
While it is difficult to project an exact outlook beyond what the administration hopes will be raised by such measures, it is difficult to mount a defence of the current system as efficient or one that enhances productivity. The level playing field provided by the proposed changes could allow the global economy to realise gains by helping determine a company’s choice of location in closer relation to supply and demand (ibid).
An increase in domestic manufacturing and a reduction in offshoring US jobs and production could be observed following the implementation of this tax. Biden proposes to achieve this through tax penalties and incentives for firms to retain their production activity in the US. As part of his plan, he has called for an additional 10 per cent surcharge on the profits made from foreign production (Deloitte, 2021). This would be an additional charge on the proposed 28 per cent corporate rate. Therefore some of the world’s top companies may be discouraged from moving jobs and production abroad where the cost of labour and resources are significantly cheaper.
The increase in the corporate tax rate would put the US at a similar place with other countries, as the current revenue raised from corporate tax is far less as a share of economic output compared to all other advanced economies. Analysts from the University of Pennsylvania’s Penn Wharton Budget Model estimated that Biden’s proposed tax reforms would raise $2.1 trillion within ten years, with roughly half the money predominantly raised following the modifications made to multinational corporation tax levels (Rappeport and Tankersley, 2021).
To encourage companies to return their production activities to the United States, Biden has proposed a 10 percent “Made in America” credit. Companies would be able to apply this credit to several qualifying expenditures, including costs associated with moving production back to the United States, revitalising existing manufacturing services, the difference in wages paid to workers in the US, and facilities to progress competition in manufacturing and employment (Deloitte, 2021).
However, Biden’s proposed reforms may hurt those countries that need the revenue the most by discouraging firms not to offshore their business. The proposal suggests that companies would also pay greater tax in the country that their business is headquartered, not just the country where their profits are sourced. The majority of the raw materials and labour are sourced from developing countries, so this tax could reduce the potential revenue source (Wheatley and Agyemang, 2021).
Establishing a global uniform tax could disincentivize companies to shift profits to low-tax jurisdictions and ensure governments do not miss out on revenue. But at the same time, this could eradicate legitimate tax competition, for example developing countries often set lower tax rates to attract business activity and headquarters. Nigeria’s ambassador to the OECD commented:
“What I understand … is that developing countries may get next to nothing. The less tax incentives developing countries offer, the more they can retain needed revenue for their development and the less they rely on borrowing or aid.” (ibid).
Developing countries are not the only ones that could be put at a disadvantage. For example, the Irish finance minister has pledged to resist Biden’s proposal as the new tax can severely affect the country’s economy. This is because Ireland is the key beneficiary of American giant firms like Apple, Microsoft and Google-parent Alphabet using it as a European base (Moon, 2021). Therefore, the implementation of this tax will not only undercut the revenue generated, but Ireland will also lose its competitive advantage in attracting multinational corporations and investors. The chief economist Dermot O’Leary, at Goodbody Stockbrokers in Dublin, expressed his concerns regarding the proposal:
“The bigger issue is what it does to our industrial strategy […] that requires a rethink about what we can offer multinationals that base themselves here.” (Brown, 2021)
The Biden administration’s plans are ambitious, however, they face significant political and operational challenges. Further details are needed before definitive claims around the feasibility of the proposals can be made. Nevertheless, should Biden secure the cooperation of OECD member-states, this plan has the scope to indelibly transform corporate America’s tax status quo.
Brown, S., 2021. Joe Biden’s tax clampdown could crush Ireland’s economic model – ‘genie out the bottle’. [online] Express. Available at: <https://www.express.co.uk/news/world/1424672/Joe-Biden-news-corporate-tax-plan-social-media-apple-microsoft-economic-model> [Accessed 16 May 2021].
Julius, D., 2021. Biden’s global corporate tax plans are brave and bold. [online] Chatham House. Available at: <https://www.chathamhouse.org/2021/04/bidens-global-corporate-tax-plans-are-brave-and-bold> [Accessed 21 May 2021].
Davison, L. and Gottlieb, I., 2021. How Biden Would Corral Billions in Overseas Profits. [online] Bloomberg. Available at: <https://www.bloomberg.com/news/articles/2021-03-31/how-biden-would-impose-minimum-taxes-for-corporations-quicktake> [Accessed 21 May 2021].
Deloitte, 2021. A change in course: Tax policy implications of the Joe Biden presidency. [online] Washington. Available at: <https://www2.deloitte.com/us/en/pages/tax/articles/biden-tax-policy-impact.html> [Accessed 16 May 2021].
Mermin, G. et al, 2020. An updated analysis of former Vice President Biden’s tax proposals. [online] Tax Policy Center. Available at: <https://www.taxpolicycenter.org/publications/updated-analysis-former-vice-president-bidens-tax-proposals/full> [Accessed 21 May 2021].
Moon, L., 2021. Ireland vows to resist US corporation tax crackdown. [online] The Telegraph. Available at: <https://www.telegraph.co.uk/business/2021/04/21/ireland-vows-resist-us-corporation-tax-cracdown/> [Accessed 16 May 2021].
Rappeport, A. and Tankersley, J., 2021. What’s in Biden’s Tax Plan?. [online] The New York Times. Available at: <https://www.nytimes.com/2021/04/07/business/economy/tax-plan-biden.html> [Accessed 16 May 2021].
Reuters. 2021. Factbox: Key elements of Biden’s corporate tax-hike plan. Available at:<https://www.reuters.com/article/us-usa-biden-taxes-factbox-idUSKBN2BN3NU> (Accessed 22 May 2021).
U.S. Department of the Treasury, 2021. The Made in America Tax Plan. [online] Available at: <https://home.treasury.gov/system/files/136/MadeInAmericaTaxPlan_Report.pdf> [Accessed 16 May 2021].
Wheatley, J. and Agyemang, E., 2021. Biden’s global tax plan could leave developing nations ‘next to nothing’. [online] Financial Times. Available at: <https://www.ft.com/content/9f8304c5-5aad-4064-9218-54070981fb4d> [Accessed 15 May 2021].
By Amir Ravat & Sebnem Oztekin
Amir Ravat is an MSc student studying International Public Policy. Sebnem Oztekin is an MSc student studying Public Policy.