The Economist - USA (2022-01-15)

The Economist January 15th 2022 SpecialreportBusinessandthestate 11

Corporatetaxes

To tax or not to tax

F

or worldpeace,theLeagueofNationswasanabjectfailure.

For companies, it has proved a great success.Inthe1920sit seta

basis for corporate taxation that has enduredeversince.Recognis­

ing  that  taxing  profits  in  different  placescan hurttrade and

growth, rights to tax were allocated first whereprofitsaregenerat­

ed and only second where a company sitesitsheadquarters.

This  principle  has  now  been  enshrinedinbilateraltaxtrea­

ties—with unintended consequences. Governmentshaverealised

they can lure investment with lower tax rates.Between 1985 and

2018 the average corporate­tax rate fell from49%to24%.Manytax

havens charge zero. The idea has grown thatcollectingtaxesfrom

rapidly growing, efficient firms is “whippingthefastox”.

Companies have also learned to pay lesstaxbyshiftingreport­

ed earnings, which is easier with the rise ofintangibleassetssuch

as brands. Although only 5% of American multinationals’foreign

staff  work  in  tax  havens,  they  book  nearlytwo­thirdsofforeign

profits there, twice as much as in 2000. In 2016around$1trnofglo­

bal profits were booked in “investment hubs”suchastheCayman

Islands, Ireland and Singapore, whose averageeffectivetaxrateon

profits is 5%. According to an oecdstudy in2015,thisrobbedpub­

lic  coffers  of  $100bn­240bn  a  year,  equivalentto4­10%ofglobal

corporate­tax revenues.

Some  action  to  improve  and  simplify  corporatetaxationwas

long overdue. But with business fast going fromsacredoxtowhip­

ping boy, governments have become less concernedwithcreating

a better system and more with just gettingfirmstopaymoretax.

Britain has decided to raise its corporate­taxratefrom19%to25%,

becoming only the second oecdcountry todososince 2000 (the

first, Chile, has reversed its decision). In AmericamoderateDemo­

crats  stopped  Joe  Biden  undoing  his  predecessor’staxreform,

which  cut  the  corporate­tax  rate  from  35%to21%.ButhisBuild

Back Better bill floated a tax on share buybacksandanexcisetaxof

95%  on  sales  of  drugs  for  which  drug  firmsrefusedtonegotiate

prices with the Medicare system.

The bill would also have raised the minimumratethatAmer­

ican multinationals pay on global profits from10.5%to15%.This

could have raised an extra $30bn a year. It

would  also  have  aligned  America  with  a

new tax pact negotiated through the oecd.

Fully 136 countries have signed up to a 15%

global  minimum  rate,  and  allocated  more

taxing rights from where companies book

profits to where they make sales. The oecd

hopes to get this deal into force in 2023. Mr

Furman,  the  former  economic  adviser  to

Barack Obama, calls it “a real sea change” in

how  companies  are  taxed.  Others  throw

around terms like “once in a century” and

“revolution”.

The  reallocation  of  taxing  rights  will

apply only to companies with global turn­

over  above  €20bn  ($24bn),  and  only  on

pre­tax profits exceeding 10% of revenues.

It  is  likely  to  raise  a  “modest  amount”,

thinks Michael Devereux of Oxford Univer­

sity’sSaidBusinessSchool.Someestimatesputitatatrifling

$5bn­12bnayear worldwide.Mr Devereuxreckonsthe global

minimummayraiseanextra4­5%ontopofwhatcompaniesal­

readypay,oraround$100bnannually.

Yetthisunderplaysthesignificanceoftheshift.Therealloca­

tionaffectssome 110 multinationalgroups saysDavidBradburyof

theoecd. MostareAmerican.Theyprobablyincludetheusual

suspectssuchasAppleandAmazon,whichhaveperfectedtheart

oftaxoptimisation.Thesefirmsfacea costlyandtediousunwind­

ingoftheirtaxarrangements—anda higheroverallbill.Asforthe

globalminimum,MrBradburyexpectscountriesandcompanies

toaltertheirbehaviour.Switzerland,whichsupportsthepact,is

murmuringaboutnewtaxincentivestoremainattractive.“Itwill

bemessy,”sumsupanexecutiveatoneAmericanmultinational.

Companiesmightoncehavekickedupa fussovertheoecd

deal.Theyhavethoughtbetterofit,givenintensifyinganti­busi­

nesssentiment.Somehaveevenpraisedtheharmonisationeffort.

Inprivate,though,executivesgrumblethattheoecdplanis“a

convenientvehicle”toraisetaxesathome.That,saysonetech

boss,iswhatMrBidenisdoing.NeilBradleyoftheusChamberof

Commercewarnsofmovingfroma racetothebottomto“araceto

thetop”.Iftaxauthoritiesbelievetheywillavoidleakage,hesays,

theymayconclude“Wecantaxasmuchaswewant.”MrDevereux

wouldnotbesurprisedif corporatetaxescreepup.

Theremaybemoreunintendedconsequences.Onemysteri­

ousfeatureofthe40­yearslideincorporate­taxrateshasbeenthat

companies’contributiontopubliccoffershasremainedflatin

richcountries,ataboutone­tenthofthetaxtake,or2­3%ofgdp.

Inpooreronesthefiguresareslightlyhigherbutequallysteady.

Analystsputthisdowntomorefirmspayingtax,corporateprofits

growingandwealthyindividualsusingcompaniestoreclassify

highlytaxedpersonalincomeaslower­taxedcorporateincome.

Thebaseofpayerslooksunlikelytodwindle.Onceknownto

taxmen,firmsrarelyextricatethemselvesfromtheirgrasp.How

thechangesaffectprofitsishardertojudge.Expertsdonotexpect

theoverhaultodampenpre­taxprofits,thoughthatcouldhappen

ifhigherratesdiscouragedinvestment.Somesignatoriestothe

dealmayretaintheiredgewithoffsettingsweetenerssuchaslow­

ertaxesonindividualsorproperty.

Therearealsounknownunknownswhichmaybecomeclearer

onlyoncefirmshaveadjusted.Twothingscanbepredicted.A bo­

nanzaawaitstaxlawyersandaccountants.Andthenewequilibri­

umwillbelessfavourabletocompanies.Onebossofa bigmulti­

nationalcompanysuggeststhatthetaxsystemistheultimatetest

ofwhatcountriescareabout.Theimplicationisthattheycareless

thanbeforeaboutkeepingbusinesshappy.n

After falling for decades, taxes on companiesarerisingagain

Inflection point

Source:OECD

*Includescentralandsub-centralrates †Proposedfor 2023 ‡Countrieswithinward investment

exceeding10%ofannualGDP §Profitscoulddouble-countintracompany dividends

50

40

30

20

10

0

2000 05 10 15 21

Statutorycorporate-taxrate*,%

UnitedStates

Britain

Ireland

Germany

France

OECDproposed

minimum

†

Employees

Tangibleassets

Totalrevenues

Profit§

Ta x

403020100

Share of multinational enterprises’

foreign activities by location, 201, %

High-income Investment hubs‡

Low-income countries Middle-income

0.16

0.07

0.06

0.14

0.1