Over many decades, global companies have perfected the art of tax evasion to the fullest extent possible. It seems that now, global leaders from different countries have had enough of companies playing by their own rules, so under the leadership of Joe Biden, they want to end the heyday of tax havens. EU Commissioner for the Internal Market, Thierry Breton, welcomed the U.S. concept of setting a minimum tax for multinational companies, regardless of the country to which their profits are tied. However, the new economic policy would affect Hungary, where the current level of corporate tax is only 9 percent. Analysis.
President of the United States of America, Joe Biden, and his government are making changes in U.S. economic policy that some analysts say resembles Franklin D. Roosevelt’s ‘New Deal’ program or Lyndon B. Johnson’s ‘Great Society’ program. The Democrats firstly passed their enormous 1.9 billion dollar coronavirus relief program in Congress, and now, an even larger 2 billion dollar infrastructure development program is on the agenda. And while there has been a lot of talk lately in the economic press that during the epidemic, governments in the more developed parts of the world have realized that they don’t have to worry so much about budget deficits if central banks are willing to finance the state by printing new money, some sort of collateral security should be developed for the large expenses. Hence, Biden’s government came up with an ambitious plan to finance their infrastructure project: collect the tax from the world’s largest companies, which have so far been hidden in tax havens.
Moreover, Treasury Secretary Janet Yellen went even further, announcing earlier this week that the U.S. government would support the introduction of a global corporate tax minimum, meaning that the tax burden on companies in any country should not be lower than a certain level.
The world’s largest companies, most of which are U.S.-based, pay as little tax as they legally can. A whole network of consulting firms, law firms, and tax havens specializing in “tax optimization” help companies achieve this goal. The success of multis in tax evasion is well illustrated by the fact that according to the latest data, Apple pays a tax of 14.4 percent, Facebook 12.2 percent, and Amazon only 11.8 percent. The amounts involved are well illustrated by a survey by the Tax Justice Network group, which estimates that around 427 billion dollars a year is lost to governments around the world as a result of tax evasion by multis.
For nearly a decade now, the topic has emerged at G20 meetings – which brings together the top 20 countries in the world economy – that countries can only act together to avoid corporate tax evasion, because if a government tries to tighten its regulations, international capital will simply move to another country.
The new U.S. president and Treasury Secretary want to tackle this phenomenon, while facing both the richest and most powerful companies in the world, as well as some other countries, such as the Hungarian government.
What does the European Union think of the initiative?
One week ago, EU Internal Market Commissioner, Thierry Breton, welcomed the U.S.’s idea of setting a 21 percent global corporate tax minimum for multis.
“I think an interesting proposal has come to the table. We support it because of financial harmonization. Not only at the European level, but also worldwide,”
the Commissioner said.
Thierry Breton said “it will be an elegant solution” after the failure of negotiations within the OECD on taxing big internet companies including Google, Amazon, Facebook, and Airbnb.
In July 2019, France unilaterally passed and then introduced a new type of tax on digital giants. “I think the 21 percent tax is very good as far as we are concerned, and we do not find it outrageous,” said the EU Commissioner, former French Minister of Economy and Finance.
What do big companies think of the initiative?
Of course, the enthusiasm of the U.S. government and other countries for cooperation is not enough to eliminate tax evasion. This requires fighting the countries that benefit from the system, and of course, the richest companies in the world.
For now, the picture is mixed and opinions are divided. The world’s richest man, Amazon founder, Jeff Bezos, reported that he understands the government’s intention to raise taxes, while an influential corporate lobby association called Business Roundtable has indicated that raising corporate tax would put American firms in a disadvantageous position on the international market.
It is expected that a large-scale lobbying campaign will be launched against the draft, but according to Miklós Sebők, Research Fellow at the Institute of Political Science of TK, the American government is not unarmed either. The government is providing investment support to various large companies such as Intel, which would build a factory with budget support to bring chip production back to America from the Far East. And these subsidies can easily be withdrawn by the government from companies that do not liquidate their foreign tax affairs. The government can also play with tax initiation types that affect each company differently, thereby indirectly favoring companies that tax at home; on the other hand, the government has the power to retract research and development benefits from those companies that hide their money in tax havens in other countries.
Which countries would oppose global corporate tax and why?
According to former EU Commissioner László Andor, secretary general of think tank Foundation for European Progressive Studies, the smallest resistance can be expected from small tropical countries that are tax havens. These countries would not be able to resist on the international stage for a very long time if they were put under pressure by the G20. However, greater resistance can be expected from European countries that benefit from international tax competition.
Under the leadership of Manuel Barroso, the European Commission drew up a plan to harmonize the tax bases of the EU states, which it submitted under the leadership of Jean-Claude Juncker. At that time the strategy was strongly connected to Hungarian tax commissioner, László Kovács (MSZP – Socialist Party). However, Ireland, Cyprus, and Hungary fiercely opposed the policy initiative.
Taxation remains a Member State authority still, and these three countries see their international success and competitiveness fundamentally in downward tax competition, as they attract multinational companies to invest in their countries. In Ireland for example, the country’s largest firms are all subsidiaries of American tech and pharmaceutical companies, which chose Dublin mainly for tax optimization, but also brought jobs to the country. Hungary also participates in tax competition, the government generously supports multi-companies with money and tax benefits, and since 2017 the country has the lowest corporate tax rate of 9 percent.
Through the Hungarian example, the Washington Post showed how the new global minimum tax would work in practice. As the OECD (Organization for Economic Co-operation and Development), would establish a global minimum tax rate – possibly around 12 percent of profits – low tax countries would face pressure to increase their rates to adhere to this new minimum, because if they don’t, other countries would be granted the authority to levy additional taxes on the overseas earnings of their firms. For instance, even though Hungary could maintain its current 9 percent corporate tax rate, despite the minimum of 12 percent, under the OECD agreement France would have the right to collect taxes on the income earned by French companies in Hungary, amounting to the difference between Hungary’s tax rate and the 12 percent global minimum. As a result, seeing that money is going to France instead of Hungary, the country could simply decide to raise its corporate tax rate to 12 percent, thereby eliminating France’s tax activity in Hungary.
Although some skeptics and critics warn that such a global minimum tax could come with significant trade-offs and procedural and administrative barriers, not to mention that it would not do enough to eliminate the decline in corporate taxes, this economic policy change would be the Biden administration’s largest project to lobby through not only with the world’s countries, but the richest and most powerful companies in the world.
Featured photo by MTI/EPA/Michael Reynolds