Europe Balks at Biden’s Tax Plan

Treasury Secretary Janet Yellen speaks at the White House May 7.


Photo:

Jonathan Ernst / Reuters

The Biden administration hopes a new global minimum corporate tax will dampen the blow of its tax hikes on the US economy. But other governments are making it clearer every day that they will not play along.

Treasury Secretary Janet Yellen enthusiastically threw herself into the Organization for Economic Co-operation and Development negotiations to write such a global tax system. President Biden would like to impose some form of alternative minimum tax on corporate profits overseas, at a statutory rate of 21% and an effective rate that is higher for many companies. Even the progressives who occupy the Biden barricades realize that if other countries do not levy similar taxes, this will affect US competitiveness.

Ms. Yellen might have thought that longstanding OECD negotiations on a global minimum tax would be an easy way to achieve this goal. Instead, European governments are adopting a version of Napoleon’s maxim: Never interrupt Washington while it is harming itself.

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One problem is the tax rate that the OECD will propose for its own version of a minimum tax. Talks seem most likely to be somewhere between 12% and 13%, which is close to the current Irish corporate tax rate. That is well below the rate Mr Biden would like to use for American companies, and European governments are aware of the competitive advantages of lower rates.

Officials in Ireland, Hungary and the Czech Republic, all of whom must approve an OECD proposal before the European Union can adopt it, recently stated that an OECD rate of 21% would be unacceptably high.

Some French and German officials have endorsed an OECD rate of 21%, but Ms. Yellen should be careful about taking such statements at face value. Paris and Berlin know that the EU’s unanimity will allow them to have a good game of higher tax rates while protecting their own businesses behind the low tax demands of the smaller EU members.

Outside the EU, the British Chancellor Rishi Sunak expressed skepticism about a rate of 21% and stated that it is “higher than in previous discussions”. He also insists that such a tax would be at the expense of Washington, which is agreeing to a new global regime to tax American tech companies that the OECD is negotiating along with the minimum tax. Let’s see what the friends of the White House in Silicon Valley are like.

The OECD will also remove some of the fine print that makes the Biden plan particularly terrifying for US businesses. The Biden Plan creates its minimum tax by revising the current tax on the global low intangible tax income (Gilti). The Gilti tax in the 2017 tax reform should only apply to “excess” profits attributable to intellectual property that American companies hold offshore. Therefore, an exemption was provided for the first 10% of the profits overseas companies make from material investments such as factories. The Biden proposal removes this 10% exemption so that the new 21% validity applies to all profits made by US companies abroad.

The OECD is moving in the opposite direction, insisting on exceptions that are more generous than current US law. “On a global level, I think it is not realistic to believe that we could move forward without some form of outsourcing that recognizes the activity and substance,” OECD chief negotiator Pascal Saint-Amans said on May 5th.

He believes that any OECD minimum tax would exempt part of the profits from property, plant and equipment. The OECD’s current draft negotiation would also exempt wage-related wage-related profits to avoid entangling too many service companies – a benefit that Congress ignored in the 2017 tax reform.

The Biden government is hoping for political and economic backing from the OECD for its tax relief. It now looks like there may be no help on the way. Congress should take this into account when legislating whether to introduce a tax hike that hinders American companies in the global marketplace.

Main Street: The Democrats’ proposed tax deduction for the rich puts Vermont socialist and low-tax Republicans in the same foxhole. Images: Getty Images Composite: Mark Kelly

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Published in the print edition on May 20, 2021.

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