Presuming that Janet Yellen, our current secretary of the Treasury, lives in California, her marginal tax rate might be as high as 13.3%. That’s a little scary for those of us living here in Maryland. Good thing she knows how to handle finances.
For that kind of tax rate she might easily be persuaded to move to the next-door state of Nevada. The rate there is zero—pretty hard to complain about.
So what is stopping her? Well, for one thing, something called “moving.” She would have to pack those bags and plant them in Nevada to demonstrate that she intends for that to be her home, what we call a domicile.
Earlier this month, Yellen called for an international corporate minimum tax rate among the nations of the world. Reason: to discourage corporations from moving to low-income countries and bringing their taxable income to a so-called “tax haven.”
But don’t they have the same burden in making that kind of move that Yellen has in trying to go to Nevada? In fact, not at all.
For multinational enterprises (MNEs) a lot of their assets are intangibles, like trademarks and patents (think of pharmaceutical companies). These are easy to move anywhere you want—just email them.
And that’s the difference that Yellen is bringing to our attention. Moving the taxable income of a MNE to a low-tax-rate jurisdiction is often just a matter of some clever paperwork by a good tax lawyer—a very good one to be fair.
This scenario is not new. Dozens of tax laws exist in most countries’ tax codes to try to recapture the tax base eroded by moving profits in ways that belie the economic reality of where the profit belongs.
Hence, Yellen’s idea is to take away this game of tax competition where countries vie to be the tax haven to the world. The competition often gets so fierce that it has been aptly termed the “race to the bottom.”
Except this idea is not new. The Organisation for Economic Co-operation and Development (OECD) made this very same proposal last summer with its Pillar II initiative to create worldwide tax fairness. It is part of its concentrated Base Erosion and Profit Sharing (BEPS) program.
The BEPS initiative seeks to close gaps in international taxation for companies that allegedly avoid taxation or reduce tax burden in their home country by engaging in tax inversions (moving operations) or by migrating intangibles to lower tax jurisdictions. Not only is Yellen’s idea not new, but it’s also protectionistic.
For years prior to the Trump administration, the United States had the dubious honor of being one of the highest-taxing countries of the world. But with the emergence of world markets, tax havens, and the ever-increasing economic wealth of intangible assets honed by the super MNEs, the attraction of tax haven countries took hold. So much so that by the end of 2017 it was estimated that at least $3 trillion was trapped in overseas accounts waiting for the right time to come back home to our shores where it would finally be taxed here.
President Trump made the time right with the 2017 Tax Cut and Jobs Act. There these otherwise U.S.-based MNEs were given several gifts.
First, a one-time tax rate at about one-third of the regular rate on the trapped overseas profits. This tax was mandatory and was expected to see most of the $3 trillion return home. In fact, by most estimates, only some $1 trillion has been repatriated so far.
The second gift was a new corporate tax rate of 21%. And with that—voilà!—the U.S. began to look like the next new tax haven of the world, when you considered that the average rate of other countries is about 24%.
Adding to that was a new tax aptly called by its acronym, GILTI, as in global intangible low-taxed income. The idea was to tax U.S. company export income at a rate of 10.5%, or half the 21% corporate rate, as an incentive to keep the U.S. MNEs and their profits based and taxed at home. Whether by design or not, it is another incentive for an MNE to be based in the U.S.
Fast-forward to the pandemic and the U.S. suddenly has new reasons for tax revenue to go up, not down. President Biden’s plan: raise that deliciously low rate of 21% to 28% and the GILTI rate from 10.5 to 21%.
Anticipating these rate changes, Yellen endorsed the idea of that corporate minimum tax around the world to protect the country’s interests—trying to avoid another round of corporate moves away from the U.S.
I wouldn’t have thought this sudden U.S. chant of “join the OECD” to look so blatantly duplicitous except when you consider that the OECD and more than 100 countries convened in Paris in 2017 to devise, draft, and have 68 countries ratify the Multilateral Instrument (MLI) in an effort to create fair taxing worldwide. Noticeably absent and not signing on—the United States.
Our excuse was that we abide by the principles with our existing law. Yet, with so much of the world economy in our backyard, the MLI is certainly hampered by our non-cooperation.
The issues of how to apply international tax principles are certainly complex in our global and now highly digital economy. But it’s high time for the U.S. to wholeheartedly work with the OECD and the United Nations Tax Committee, both cooperative partners to this point.
About the author:
Sam Handwerger, CPA, is a full-time lecturer in accounting and taxation at the University of Maryland’s Robert H. Smith School of Business. He was a senior tax researcher with EY in New York City and later led the tax planning and preparation departments of the CPA firm Handwerger, Cardegna, Funkhouser & Lurman.