US Proposes a New Plan in Global Negotiations on Corporate Taxation

The proposal regarding multinational companies will result in taxation calculated on a country-by-country profit basis.

Joe Biden’s administration proposed a new model of international corporate taxation that will affect the world’s biggest corporations by obligating them to pay taxes to national governments according to local sales. This is a part of a larger proposal of a global minimal corporate tax on profits, a Washington initiative.

In documents sent to 135 countries, an ongoing effort of international negotiation through the Organization for Economic Cooperation and Development in Paris, reviewed by the Financial Times, the United States Treasury detailed a tax plan that will apply to the biggest companies, including American ones, and their profits, regardless of a company’s physical presence in any given country. The plan could serve as a catalyst for negotiations in OECD and its developed country member-states by promising a stable international system of taxation that will result in the elimination of tax evasion by large multinationals as well as prevent the creation of nationalized taxes on digital goods.

The flurry of activity by the United States coincides with the upcoming spring conference of the International Monetary Fund and the World Bank, and comes on the heels of the White House’s new domestic proposal of corporate tax increases — $2.5 trillion in the next 15 years — in order to raise funds for infrastructure, green energy and high-tech investments totaling over $2 trillion.

After nearly a decade of OECD negotiations on taxation, one can observe two patterns. The first is meant to serve as an initial step that begins to create a new regime of international taxation; the second is a response to the U.S.’ proposal for a minimum corporate tax rate of 21%.

Benefits to the US and the Rest

An OECD agreement will allow the Biden administration to increase American corporate tax rates without fear that such increased taxation will cause a flight toward lower-taxation countries.

If the U.S. proposal is accepted, other countries could increase revenue stemming from large American tech companies, as well as other large American corporations, that operate in their territory but have so-far been a subject to a lower corporate tax rate. Washington’s offer is reflective of Biden’s larger effort to end the global race to the bottom, in which increasingly lowered tax burdens starve governments of crucial revenue needed for investment and basic services.

The OECD has failed to reach a consensus on international taxation for years because the U.S. has opposed the possibility of other states levying taxes on American companies, especially on the giant American tech corporations.

The current U.S. Treasury Department proposed a new formula in which only the biggest, most successful corporations in the world will be subjected to the new rules. Taxes will apply in all industry sectors and be calculated by the companies’ profit margins. These rules will likely apply to about 100 companies. The American proposal has already been sent to the OECD, who will in turn organize negotiations, try to bridge the gaps between various member states and aim to produce a global agreement by the summer.

Pascal Saint-Amans, director of the Center for Tax Policy at the OECD, welcomed the U.S. proposal. “This reboots the negotiations and is very positive. It is a serious proposal with a chance to succeed in both the [international negotiations] and U.S. Congress. Peace is more important than anything else and this would stabilize the [international corporate tax] system in the post-coronavirus environment.”

According to Saint-Amans, the proposal, if approved through the OECD, will result in a revenue windfall for many states as well as allow the U.S. to collect the funds it needs from its largest companies.

Many experts on international taxation believe that the OECD proposals do not go far enough and that they do not give developing countries enough leeway in raising taxes. The U.S. proposal does not change this, even if Washington is showing some flexibility on other details. The agreement will help the U.S. in its transatlantic disputes with other states that have introduced local taxes on digital services without striking an international agreement.

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