High ambitions can lead to great success. But, as demonstrated by the mythical Icarus who flew too close to the sun, high ambitions can also cause an otherwise promising effort to crash and burn.
That’s the fate tax officials in the United States and more than 100 other countries are likely to face with the current effort to establish a 15 percent global minimum tax for corporate taxpayers.
It does not have to be that way. The current proposal seeks participation and perfection from every country on the globe. Centuries of respect for national sovereignty with respect to tax policy is ignored, or rather bulldozed to the ground. The penalty rules for recalcitrant countries are hideously complex.
But perfection is not achievable. And so, the headline is already visible: “Global minimum tax initiative fails.”
It does not have to be that way. By redefining success, and showing a little patience, the United States and other countries that favor a minimum tax can succeed.
The model should be two initiatives through which the United States has already changed global commerce for the better: the war against corporate bribery of government officials and the success in dismantling bank secrecy.
The goal of a global minimum tax is worthy. The campaign seeks to ensure that corporate taxpayers, wherever headquartered and wherever their operations lie, pay an income tax of at least 15 percent. If achieved, the agreement would stop a dreaded “race to the bottom,” in the words of Treasury Secretary Janet Yellen, as countries continually reduce corporate taxes to attract investment. The United States already has a global minimum tax in its law and the proposal from the Paris-based Organization for Economic Cooperation and Development is modeled to a large degree on the U.S. rules.
But the current proposal, driven by Yellen, the G-20 and the OECD, seeks perfection.
U.S. penalty rules — the so-called SHIELD Act — and the OECD’s penalty rules are slightly different. But both would impose new and higher taxes on companies simply because their shareholders reside in another, nonparticipating country.
Take a U.S. company, owned by Irish shareholders. Ireland famously has a 12.5 percent corporate tax rate, below the proposed 15 percent minimum. The U.S. company may have been in existence for 50 years and employ 1,000 U.S. workers. Suppose the company pays royalties and service fees to the Irish parent that are required under both U.S. and Irish law. Because Ireland resists the global minimum tax, however, the U.S. would deny certain tax deductions to the company, raising its U.S. taxes and threatening to make it uncompetitive. Yellen calls this the “stick” to ensure that other countries cannot undermine the global initiative.
Is the stick fair when the U.S. company is complying with all U.S. laws? Will Congress penalize U.S.-operating businesses solely because of their Irish owners? Not likely.
Let’s redefine success.
Instead of seeking immediate global adherence to a minimum tax — a kumbaya outcome that involves at least 140 countries figuratively holding hands — Yellen and the OECD need to encourage a minimum tax and then apply peer pressure, but not penalties, to the major capital exporting countries.
There is precedent for moving countries to better international practices. The U.S. adopted the Foreign Corrupt Practices Act in 1977 and launched a crusade to encourage other countries to forbid bribery. Progress was slow; Germany allowed tax deductions for bribes until 2002. But, today, countries widely outlaw the bribery of foreign officials.
Similarly, the U.S. pressured Switzerland to abandon its business model of bank secrecy, which encouraged taxpayers outside Switzerland to stash funds in numbered bank accounts. With time and help (especially from Germany), the effort succeeded. Now, only a tiny number of outlier countries offer bank secrecy.
If Yellen and the OECD proceed on the current path toward a global minimum tax — challenging national sovereignty and imposing economic penalties on companies solely because their owners reside in countries that resist the minimum tax — the effort will fail.
If success is redefined so that the G-20 agrees on best practices for a minimum tax, essentially adopting some version of the existing U.S. minimum tax regime, and then aggressively encouraging countries to enact the rules into each country’s domestic law, progress is possible.
There is broad support in the G-20; most large capital exporting countries have indicated approval. The success rate on Day One could be well above 50 percent of the world’s commerce. Further progress can be tracked and celebrated.
Yellen must not let the perfect be the enemy of the good. The U.S. success in global initiatives to combat corporate bribery and bank secrecy shows that persuading countries to impose a global minimum tax on their resident investors can work. It just takes time.
Peter A. Barnes is an of counsel tax attorney at the law firm Caplin & Drysdale, a senior fellow at the Duke Center for International Development and president-elect of the International Fiscal Association. He previously served as a deputy international tax counsel at the Treasury Department and as a senior international tax counsel at General Electric.
H. David Rosenbloom is a member at Caplin & Drysdale. He previously served as the international tax counsel and director of the Office of International Tax Affairs at the Treasury Department and as a tax policy adviser for the OECD, USAID and the World Bank in Eastern Europe, the former Soviet Union, Senegal, Malawi and South Africa.