Since the US tax reforms came into force, American businesses are still adjusting to the impact of two minimum tax rates. The base erosion anti-abuse tax (BEAT) and global intangible low-taxed income (GILTI) provisions have imposed minimum tax rates on those US multinationals running a low-tax strategy.
Many companies feared that these provisions would inflict a heavy toll on their operations. However, the experience of US tax reform so far may have prepared American businesses for the possibility of such provisions becoming the global standard.
“As long as US companies take credit for the fact that all their foreign income is subject to GILTI then they are less concerned about a minimum tax becoming the norm around the world,” said Bill Sample, chairman of the tax committee at the US Council of International Business (USCIB).
“The key issue for US businesses is that they want the minimum tax to be calculated on a worldwide basis,” he explained. “You look at the consolidated company worldwide income and, if it’s taxed at a high enough effective rate, then no other country would be able to apply a minimum tax to the income.”
The OECD is now considering global minimum rates as one possible solution to the dilemma of digital tax. Some hope that it could be the solution to tying up all the loose ends of the BEPS project, but these policies have been proposed before.
TP Week can confirm that Canadian officials have been discussing the prospect of a GILTI-style rate to match the US, while some opposition politicians in the UK are also considering forms of a minimum corporate rate. Such ideas can sit on the shelf for years before a government takes them up.
Meanwhile, the EU has faltered in its efforts to establish a minimum rate across the bloc. It is unlikely that such a proposal will become EU policy any time soon. Several EU states are concerned that this system would limit tax competition. Yet this is exactly why US companies are warming to the idea.
“If the minimum tax were applied on a global, worldwide basis with a consistent rate, it would not be a problem for US companies,” Sample said. “Someone here [at the USCIB] was saying that the rate could be set [somewhere] between the rates [used] in Hungary and Ireland [9% and 12.5% respectively].”
“A minimum tax rate set on that basis would not necessarily be anti-competitive, especially if you get full GILTI allowances,” he added. “If you don’t have to go to each individual country and go through a process, then it’s much simpler.”
Ireland’s and Hungary’s rates are the lowest in Europe. The GILTI regime drops a minimum rate of 10.5% to 13.125% on multinational groups with effective rates that drop below 13.125%. By contrast, the BEAT rate is 10% until 2026 when it will rise to 12.5%.
These measures may be enough to restrict the flight of capital and assets to low-tax jurisdictions. However, many companies are playing the long game and waiting for greater certainty about the future of US tax policy before repatriating certain assets.
One US stockbroker, who specialises in tax efficient investments, told TP Week: “The leakage was always that non-repatriated profits of US companies could escape taxation. Now they can’t [do this] so easily thanks to Trump’s tax reform bill.”
“There’s still some leakage from private companies based in tax havens, but any large-scale US corporate has to pay out to their shareholders and that income is now taxed,” the broker said.
Many of these tech companies were not repatriating profits to the US, where they would have paid corporate tax at the full rate – minus any foreign taxes paid. Now more companies are paying US taxes on non-repatriated profits (though not all).
“Suddenly all the rhetoric about ‘non-taxation’ of big tech profits has a hole in it,” the tax director said. “It’s still true that there’s the argument the profits aren’t being taxed in the right place, but then given that it’s the IP creating the economic value maybe that’s fair.”
“We’ve moved entirely from ‘how do we tax at all’ to ‘who gets the cash,’ which is a rather different argument,” the director told TP Week.
This is the crux of the matter. The BEPS project was about ensuring profits were taxed somewhere, but BEPS 2.0 is about ensuring market jurisdictions get their ‘fair share’. The problem is finding a consensus on what constitutes a ‘fair share’ and how to make it happen.
Bill Sample was speaking in a personal capacity.