Its rise can be dated to the 1990s when, with the relaxation of restrictions on the movement of capital around the world, governments realized they could attract businesses and jobs by setting a corporate tax rate. lower than that of their neighbors.
The Republic of Ireland, which currently has a corporate tax rate of 12.5%, is a good example of a country that has attracted billions of dollars in foreign direct investment through tax competition.
Ireland, whose weak corporate tax regime actually dates back to 1956, is said to have attracted over 700 companies from the United States to its shores alone through this policy.
It has accelerated as more countries have moved to service economies in which companies use less and less “tangible” assets like buildings and machinery and more “intangible” assets. like intellectual property. The latter are easier to move from one place to another than the former.
Yet this practice has also drawn criticism. Other EU countries, particularly Germany, have bemoaned the low corporate tax rate in Ireland, especially when the EU sought to harmonize the tax rates of other levies such as the VAT.
More recently, tax competition has been criticized for how it has allowed tech companies in particular to divert their profits to low-tax jurisdictions by registering their intellectual property there.
Now the United States is looking to turn the tide back.
Janet Yellen, the new US Treasury Secretary and former Chairman of the US Federal Reserve, said in a speech to the Chicago Global Affairs Council on Monday that there had been “30 years of race to lower tax rates. companies “.
She added: “We are working with the G20 countries to agree on a minimum global corporate tax rate that can stop the race to the bottom. Together, we can use a global minimum tax to ensure that the global economy thrives on a more level playing field in the taxation of multinational corporations, and spurs innovation, growth and prosperity. “
His words were greeted with joy by multinational organizations such as the Organization for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF).
Gita Gopinath, Director and Economic Advisor at the IMF, said: “We have been in favor of a global minimum corporate tax for a long time, it is a huge concern that we have a lot of tax evasion, countries that send money. money to another. “
Different finance ministers – mostly high tax jurisdictions – also welcomed Ms Yellen’s comments.
Olaf Scholz, Germany’s finance minister, said they were “a big step forward” while Bruno Le Maire, France’s economy minister, said countries should “seize this historic opportunity”.
However, just because a lot of people are in favor of such a deal doesn’t mean it will happen.
The key question is the level at which such a tax rate would be set.
One clue to this is where the Biden administration set the so-called GILTI – the world’s low tax intangible income tax rate.
This was created by Joe Biden’s predecessor Donald Trump in 2017 with the aim of getting more companies to bring their profits overseas to the United States. Previously, US companies were taxed on their worldwide income, but could defer tax on their overseas profits until those profits returned to the United States in the form of dividends.
The Trump administration had initially considered exempting the foreign profits of U.S. companies from tax, but feared this would cause them to shift even more of their profits overseas. So he created a new minimum tax on income from “intangible assets,” like patents and trademarks, to discourage this.
This tax rate, the GILTI, was set at 10.5%. It actually sets a minimum tax rate on the profits of US multinationals.
However, critics say the rate is too low and does not generate enough revenue for the U.S. government, which is why Biden is proposing to double the rate to 21%.
So that’s probably the level at which a rate could be set.
Ms Yellen also dropped a potential obstacle to a global deal. Steve Mnuchin, his predecessor, had supported reforms to the international tax system but insisted on a so-called “safe harbor” regime that would have allowed large American technology companies to evade the new tax rules governing digital services. These were seen as a stumbling block to any deal.
Another problem is how countries pushing for corporate tax harmonization can persuade others to accept it. Countries like Singapore, Ireland, Hong Kong, Switzerland and a number of Caribbean countries will not give up their right to set low corporate tax rates easily.
Pashal Donohue, the Irish finance minister, has already expressed his concerns.
He said: “The emphasis on a global minimum tax rate is a perspective I have reservations about – what would be the impact on the competitiveness of small and medium-sized businesses that have tax rates and use of companies below. this as part of their overall competitive model. “
Expect to hear claims from these countries that they are intimidated by larger countries – claims that will be welcomed by a supporting audience.
Ireland’s low corporate tax rate, for example, is popular with its electorate and has been praised by no fewer than Bono.
The musician and anti-poverty activist, arguably the world’s most famous living Irishman, told The Observer in 2014: “We are a very small country, we have no scale, and our version of scale is to be innovative and to be smart, and fiscal competitiveness has brought our country the only prosperity we have known.
“That’s how we brought these companies here. We don’t have natural resources, we have to be able to attract people. ”
In the meantime, even if the principle of a global corporate tax rate is accepted, other arguments remain to come. One of them would be how to monitor the system and how willing tax collection agencies around the world would be to exchange and share information. Another would be to know how to distribute the taxes paid by a large multinational between the countries where it makes its profits.
Supporters of a minimum corporate tax rate argue it’s an idea whose time has come, and especially when the Trump and Biden administrations backed the principle.
But that doesn’t mean that no international agreement is imminent.