The New 15% Global Minimum Corporate Tax: Truth or Hype?

The headlines are about a big breakthrough in the taxation of multinational corporations, especially big tech. The OECD (Organization for Economic Co-operation and Development) has announced a time to celebrate. One hundred and thirty-six countries have agreed to apply an overall corporate tax rate of at least 15% and a fairer system of taxing profits where they are made.

But are they?

Let’s take a look at how corporations do their tax evasion. In 2012, Ian Griffiths, investigative reporter for The Guardian The newspaper revealed the surprising fact that Amazon claimed sales of $ 213 million in Britain, while its sales in Luxembourg were $ 11 billion.

What? Where? Luxembourg? It is the last Grand Duchy of Europe. With a population of less than 500,000, it is a smaller country than the average American city. It is also one of the main financial centers in the world and recognized as being in the big leagues with New York, London and Hong Kong. How can little Luxembourg be so amazing? It sells something everyone wants, something more valuable than gold, diamonds or oil – tax break, and at a very affordable price.

The Financial Times described this Dutchy as: “Luxembourg sometimes looks like a criminal enterprise with a country attached.

But calling little Luxembourg a criminal enterprise is a bit unfair because countries like the United States – including their tax courts – declare that these tax evasion schemes by multinational corporations are completely legal.

What is there for the tax haven?

While in the United States and most developed countries the corporate tax rate would be around 30% (only 21% currently in the United States), a tax haven like Luxenberg will only charge 2%. It will give the company a tax opinion guaranteeing this rate, provided the company also commits to having a minimum footprint in the country. Thus, for its sales in Great Britain, Amazon will have most of its employees in Great Britain, but only symbolic personnel, if any, in Luxembourg. Therefore, UK taxpayers pay for the health care of these employees, the education of their children, etc. Luxembourg does not provide any of these services. The 2% is a pure sauce.

Is it really such a big tax haven?

In 2014, a Luxembourg PricewaterhouseCooper (PwC) auditor Antoine Deltour became so upset by what he saw and the fact that nothing was done about the revelations on Amazon that he felt he had to do something. He appeared on the French equivalent of 60 minutes called Treasury surveys and describes small office buildings with a long list of large multinationals (MNCs) on its doorstep.

On a building entrance, there were 340 multinationals on the list. Think about the names of all the big companies you know until you’re too tired to continue: Microsoft, Amazon, Koch Industries, etc. Most will be on a doorstep in Luxembourg. Of course, as you might expect, the name “Disney” pops up in this fairyland of dreamy tax rates.

Imaginary expenses

The creative ways that tax professionals and accountants imagine to reduce taxes, and that government tax offices approve, are admired. Here is another described by tax law professor E. Kleinbard of the Gould School of Law in lecture notes he titled, Through a Darkly Latte.

Starbucks can buy coffee beans directly from producers in South America, but it has incorporated a company in Switzerland from which Starbucks US purchases its coffee. The beans are not shipped to landlocked Switzerland, but directly to the United States. The Swiss firm only processes orders on its computers. Starbucks Switzerland charges Starbucks US for this service and is permitted by the IRS.

So how does the tax authorities allow this obvious dodge? There is a tax rule called “transfer pricing”. It allows a company to charge for internal services what it would pay if it had purchased these services from an external company. Starbucks was able to show that small cafes have to order through a paid broker, for discussion purposes, around 20%.

Together, this relocation of sales and expense allocation is called profit transfer.

How big is the loss for the United States?

In the fall 2014 edition of The Journal of Economic Outlook, Gabriel Zucman noted that it was difficult to estimate the exact amount of tax losses for the United States due to the secrecy of tax havens regarding this practice, but he could give us a dismaying estimate that the United States is losing 20 % of corporation tax thereby completely Legal method of tax evasion:

“Measuring the costs of tax havens for foreign governments is fraught with pitfalls. However, balance of payments data and business returns show that U.S. businesses are profit transfer in Bermuda, Luxembourg and similar countries on a large scale and more and more. About 20% of all US corporate profits are now accounted for in such havens, a tenfold increase since the 1980s. “

What is the new reform for?

So before the reform we had fictitious places of sale plus imaginary expenses – remember, all perfectly legal, but only because governments say so.

One would expect the reform to be simple and straightforward by requiring companies to report 100% of their sales in the country on that country’s tax return; for example, sales to the United States would be reported as income earned in the United States. Of course not. Simple reforms would not allow tax evasion to continue. The reform says that only 25% of sales made in a country must be declared in the country, 75% remain in the tax haven. Now that 75% is also taxed at 15% but it goes to tax haven. This is even much better than filing in the US at the starting tax rate of 30%.

And there is another small exemption: corporate profits are only taxed over 10%.

And if you think so, yes, but there are so many other deductions in the US that they won’t pay 30%. Well, tax havens can give them the same tax benefits. There are also complex safe-haven provisions and carry-overs in the new reforms. It will be another 20 years before investigative journalists and whistleblowers reveal how tax havens actually charge the 15% of the 75%.

Complexity is used rather than simplicity to hide freight train size loopholes in convoluted exceptions. (Dodd Frank on Glass Steagall is another example) You average voter can’t criticize it, the convoluted wording tells you, because you can’t understand it, you have to be impressed by this high level achievement – and believe what we tell you about it.

However, Susana Ruiz, Head of Tax Policy at Oxfam, has the patience and expertise to read and understand the proposal. Here is his conclusion:

“The tax devil is in the details, including a complex web of exemptions that could get big violators like Amazon off the hook. At the last minute, a colossal 10-year grace period was applied to the 15% global corporate tax, and additional loopholes leave it virtually bite-free. “

15% of Biden

Biden offers a minimum corporate tax of 15% on US-based companies, but this relates to sales they record as made in the US. This does not affect the tax evasion schemes by which sales made in the United States and transferred to a tax haven.

ultimately

The 15% minimum corporate tax avoidance reform is just another of many examples of financial reforms that appear to address economic inequalities, but do the minimum to preserve them. The United States or any other country does not need to seek the cooperation of other countries to tax sales made in their country. The US tax code might specify that a sale in the United States is a sale in the United States

While the headlines uncritically proclaim a big step forward as all businesses will now pay 15% tax, they fail to mention that the US will only get 15% of 25%. after deducting 10% of reported sales in the United States.

I cannot say better than Susana Ruiz of Oxfam: “Today’s tax deal was about ending tax havens for good. Instead, it was written by them.

While reform may be a step in the right direction, it is a small step. But, multinationals are now immune to an effective attack on their privileged tax regimes for decades to come.

Jan D. Weir