UPDATE - ANALYSIS - US Global Minimum Tax Plan Will Likely Kill Competition Before Leveling Field

WASHINGTON (UrduPoint News / Sputnik - 13th April, 2021) The US plan for a global minimum corporate tax of 21 percent would likely kill competition before achieving uniformity given some 20 countries are enforcing only a quarter to half of that rate, analysts told Sputnik.

President Joe Biden wants to raise corporate taxes within the United States to 28 percent from 21 percent to compel American companies to pay more in funding his $2.2 trillion infrastructure plan. Biden laments that many big US corporations pay little or no tax now by having their headquarters in countries with low or zero tax.

In 2017, Biden's predecessor Donald Trump cut the US corporate tax rate from 35 percent to 21 percent, winning cheers from the business sector.

The 7.0 percentage point hike sought by Biden could be politically unpopular and prompt more American companies to move offshore to avoid a higher tax bracket. By raising the global minimum as well, the president hopes to collect at least 21 percent from US firms that will relocate or are already operating abroad.

On Monday, a majority of CEOs in a survey conducted by the Business Round Table said the tax would hinder economic expansion.

BIDEN'S PROBLEM: A BAIT WITHOUT THE RIGHT CARROT

The problem for Biden, however, is this: In seeking an international solution to a domestic issue, he has no incentive to offer other countries to make the tax changes he wants.

Nations that have drawn investors on the strength of their low costs and did not suffer trillion-dollar budget deficits, like the United States, are not likely to bite his bait without the right carrot.

"Ireland's economy is doing very well with a 12.5 percent corporate tax and the Irish will fight Biden's plan like hell," Bryant University Economics Professor Ramesh Mohan told Sputnik.

A Sputnik study of the 20 countries with the lowest corporate tax, compiled by the Washington-based Tax Foundation, showed their average tax rate to be 10 percent.

Aside from Ireland, which is also on that list, these countries were mostly located in Eastern Europe, the Mediterranean, Central Asia and South America, and were not necessarily known for having strong economies.

Barbados, the only North American country in that list, had the lowest tax rate of 5.5 percent. But Barbados' economy contracted by 0.1 percent in 2019 versus the 2.2 percent growth in the US economy.

Two other countries with a tax rate of 12.5 percent - similar to Ireland's - were Liechtenstein and Cyprus. Liechtenstein's gross domestic product shrank by 1.2 percent in 2019 while Cyprus' GDP grew by 3.1 percent.

That makes Ireland, which registered a GDP growth of 5.5 percent in 2019, an exception.

The overarching point from the study was that low taxes on their own did not necessarily result in great economic performance.

That might work in Biden's favor, as he could argue that with higher taxes, these countries will theoretically get more revenue for their growth.

But one could argue that the opposite is also true: By raising taxes, these countries risk eroding their competitiveness and could further jeopardize their economies.

IRELAND A HEADACHE FOR THE US TAXMAN

Ireland, particularly, poses a conundrum to the US taxman.

More than a thousand big, mostly American, global companies already have operations in Ireland, among them being Google, Apple, Facebook, PayPal, microsoft, Yahoo, eBay, AOL, Twitter and Intel. Pfizer, Boston Scientific and Johnson & Johnson also have a major presence there.

The US companies account for 90 percent of all of Ireland's manufactured exports and employ around 10 percent of its workforce. They helped pull the Irish economy out of the 2010 eurozone debt crisis which engulfed Greece and Portugal, countries with corporate taxes of 24 percent and 31.5 percent, respectively.

"The idea is to make the US companies pay something and not get away scot free," said Mohan.

"If you ask me, it's a good initiative because many companies are using the tax loophole that allows them to base overseas to park their money in tax havens and not pay the US a cent sometimes. Yet, getting everyone on board will be a problem as those charging less than 21 percent now will argue that this is a competition-killer."

As the Irish Times noted in an op-ed on Friday, talk of a major shake-up of the way corporate tax is collected internationally has been on for many years, with a series of proposals from the European Union, reform plans in the United States and lengthy talks on an international deal among the 139 countries on the Paris-based Organization for Economic Co-operation and Development, or OECD.

So far the impact of these has been limited - EU plans have run into the sand; reform programs by former US President Donald Trump did not hit foreign direct investment as some had feared; and the OECD talks, while agreeing on a first phase of reform, have struggled to make progress beyond that.

Now, along with the US global minimum tax plan, the OECD has raised a digital sales tax plan. It proposes that multinationals pay tax on what they sell through digital channels in the markets where they do so. This is a change from current rules under which profit is declared and tax paid in countries from where the digital sales are managed.

Crucially, the United States supported a version of this plan during a week of submissions to the OECD, suggesting that the biggest companies pay a levy on their sales to the exchequer of the country where the transaction took place. This is seen as a quid pro quo; it will affect US companies, but the Biden administration hopes it will also help win support from Europe and other players for its minimum tax rate plan.

"There are two dangers here for Ireland," op-ed writer Cliff Taylor said. "The clearest is the potential loss of revenue from the digital sales tax (this would not mean corporation tax would necessarily fall, but it would be lower than it would otherwise be). However, the more serious threat to Ireland's regime is more likely to be the new... US tax rate and the possible agreement at OECD level on a minimum global corporate tax rate."

Besides Ireland, the US Internal Revenue Service also has to contend with tax jurisdictions like Jersey - an island in the English Channel, between England and France, that is not to be mistaken with the US state of New Jersey.

The island of Jersey, which has zero corporate tax, has been the offshore haven to park the profits of Apple. The iPhone maker, meanwhile, continues to operate its corporate headquarters at a 32-acre gleaming technology park in Cupertino, California that also houses the so-called Apple Campus.

BIDEN WON'T EASILY FIND GLOBAL SUPPORT FOR HIS TAX WAR

Biden vowed on Friday to crack down on Apple and other large US companies like Bristol Myers Squibb that have long employed complicated maneuvers to reduce or eliminate their tax bills by shifting income on paper between countries.

"I'm not trying to punish anybody, but damn it - maybe it's because I come from a middle-class neighborhood - I'm sick and tired of ordinary people being fleeced," the president said.

Johns Hopkins University Economics Professor Louis Galambos said while Biden had authority to determine the US tax structure, it would be overbearing on the president's part to direct foreign governments on how to levy companies in their jurisdiction, particularly if it is tantamount to destroying their competitiveness.

"The problem is two-fold," Galambos told Sputnik. "Why should other countries give up their competitive advantage to help Biden? I doubt another democracy would hurt its own people to help the US. This is a return to a failed foreign policy of nice words and poor performance."