You were fed with newspapers headlines informing G7 gave its consent for Biden’s global tax proposal which ensures right companies pay right tax in right countries. Mr. Joseph Robinette Biden Jr, the current American president brought the tax reform known as ‘Made in America tax proposal’ which is reproduced below for our detailed discussion.
https://home.treasury.gov/system/files/136/MadeInAmericaTaxPlan_Report.pdf
Let us learn what he has proposed: (I shall add my observations when required)
- Last week, President Biden proposed the American Jobs Plan, a comprehensive proposal aimed at increasing investment in infrastructure, the production of clean energy, the care economy, and other priorities. Combined, this plan would direct approximately 1 percent of GDP towards these aims, concentrated over eight years.
- This report describes President Biden’s Made in America tax plan, the goal of which is to make American companies and workers more competitive by eliminating incentives to offshore investment, substantially reducing profit shifting, countering tax competition on corporate rates, and providing tax preferences for clean energy production. Importantly, this tax plan would generate new funding to pay for a sustained increase in investments in infrastructure, research, and support for manufacturing, fully paying for the investments in the American Jobs Plan over a 15-year period and continuing to generate revenue on a permanent basis.
- The President’s Made in America tax plan is guided by the following principles:
1. Collecting sufficient revenue to fund critical investments. A primary objective of the Made in America tax plan is to promote competitiveness by funding critical new investments. Corporate tax revenues have fallen dramatically from 2 percent of GDP in the years before the Tax Cuts and Jobs Act (TCJA) to 1 percent in the years since the enactment of TCJA.
2. Building a fairer tax system that rewards labor. In recent decades, the share of national income derived from labor has declined relative to that derived from capital. The plan would counter the incentives in US tax code that contribute to that trend. (Can you believe that American tax codes encourage shifting of investments abroad?)
3. Reducing profit shifting and eliminating incentives to offshore investment. The enactment of a country-by-country minimum tax aims to substantially curtail profit shifting by U.S. multinational corporations. (Perhaps, most of us are aware that USA virtually shifted its whole manufacturing base to China or others like Ireland who offer virtually unlimited benefits to these companies. I have personally seen while driving through Kansas, Indiana or any other mid- eastern states of USA a large number of empty company sheds )
4. Ending the race to the bottom around the world. Countries too often compete for multinationals’ business by reducing corporate tax rates which makes it difficult for the United States and other countries to meet revenue needs. The President’s plan provides a strong incentive for nations to join a global agreement that implements minimum tax rules worldwide through the denial of U.S. deductions on related party payments to foreign corporations residing in a regime that has not implemented a strong minimum tax. This aspect of the plan is designed to help level the playing field between foreign and U.S. companies.
5. Requiring all corporations to pay their fair share. To ensure that large, profitable companies pay a baseline amount of taxes, the President’s plan would impose a minimum tax on firms with large discrepancies between income reported to shareholders and that reported to the IRS. It would also provide the IRS with resources to pursue large corporations who do not meet their tax obligations, reversing a trend toward fewer corporate audits. (Let us recollect that IRS has made enormous contribution in tracing shifting of funds or non-reporting of income popularly known as global income by individuals by entering into tax treaties with a large number of countries to exchange information of bank accounts maintained by citizens abroad and do not care to report to parent country from where they draw passport)
6. Building a resilient economy to compete. To complement initiatives in the American Jobs Plan that would change the path of energy production in the United States and provide resources for a new research and development agenda, the tax plan would end long-entrenched subsidies to fossil fuels, promote nascent green technologies through targeted tax incentives, encourage the adoption of electric vehicles, and support further deployment of alternative energy sources such as solar and wind power. (The recent efforts of USA in this direction will be watched carefully, particularly, after its rejoining Paris accord)
How does USA intend to achieve its goals, stated and discussed above?
We have to understand USA with its tax proposal as given below, before we take up further discussion.
The Made in America Tax Plan
The current corporate income tax regime contains incentives for corporations to shift their production and profits overseas. Declining corporate tax revenues hinder the ability of the United States to fund investments in infrastructure, research, technology, and green energy.
The Made in America tax plan would fundamentally reorient corporate taxation to reverse this legacy.
The Made in America tax plan implements a series of corporate tax reforms to address profit shifting and offshoring incentives and to level the playing field between domestic and foreign corporations. These include:
1. Raising the corporate income tax rate to 28 percent;
2. Strengthening the global minimum tax for U.S. multinational corporations;
3. Reducing incentives for foreign jurisdictions to maintain ultra-low corporate tax rates by encouraging global adoption of robust minimum taxes;
4. Enacting a 15 percent minimum tax on book income of large companies that report high profits, but have little taxable income;
5. Replacing flawed incentives that reward excess profits from intangible assets with more generous incentives for new research and development;
6. Replacing fossil fuel subsidies with incentives for clean energy production; and
7. Ramping up enforcement to address corporate tax avoidance.
These are the major elements of the Made in America tax plan, but the proposal contains several additional tax incentives that would directly benefit U.S. corporations, passthrough entities, and small businesses.
These include, for example, a marked increase in the resources available through the Low-Income Housing Tax Credit and other housing incentives.
This report, however, is focused on the elements of the package directly related to corporate tax reform and reforming energy incentives.
G 7 consists of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States of America.
The Guardian, UK’s 200-year-old news- paper vide its edition dated 5th June 2021 informed its readers that the G7 group of wealthy nations had signed a landmark deal to tackle tax abuses by some of the world’s biggest multinationals and establish a minimum global corporation tax for the first time.
The principle of the agreement was that multinationals would have to pay a minimum tax rate of at least 15% in each country they operate.
Now that we have gone through the terms of USA tax proposal along with its modified acceptance by G7, one would like to know whether any action has been initiated by European economic bloc OECD so far regarding reforms in international taxation since tax havens have successfully drawn major world organizations with little or less tax regime.
To quote information from following website would refurbish our knowledge about progress made by G20 and other countries in collaboration with OECD on global tax reforms.
https://www.oecd-ilibrary.org/sites/beba0634-en/1/3/1/index.html?itemId=/content/publication/beba0634-en&_csp_=71b32056ea489ac3c26f0ea639f0fb6e&itemIGO=oecd&itemContentType=book#chapter-d1e222
To learn from OECD that reforming the international tax system to address the tax challenges arising from the digitalization of the economy has been a priority of the international community for several years, with commitments to deliver a consensus-based solution by the end of 2020 gives reassurance that reforms on international taxation is on the way to achieve greater and equitable goals.
The tax challenges emerging from digitalization were first identified as one of the main areas of focus of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project, leading to the 2015 BEPS Action 1 Report (the Action 1 Report). The Action 1 Report found that the whole economy was digitalizing and, as a result, it would be difficult, if not impossible, to ring-fence the digital economy.
In March 2018, the Inclusive Framework, working through its Task Force on the Digital Economy (TFDE), issued Tax Challenges Arising from Digitalization – Interim Report 2018 (the Interim Report) which recognized the need for a global solution.
Since then, the 137 members of the Inclusive Framework have worked on a global solution based on a two-pillar approach. Pillar One is focused on new nexus and profit allocation rules to ensure that, in an increasingly digital age, the allocation of taxing rights with respect to business profits is no longer exclusively circumscribed by reference to physical presence.
Pillar One seeks to adapt the international income tax system to new business models through changes to the profit allocation and nexus rules applicable to business profits. Further, it expands the taxing rights of market jurisdictions (which, for some business models, are the jurisdictions where the users are located) where there is an active and sustained participation of a business in the economy of that jurisdiction through activities in, or remotely directed at, that jurisdiction.
Pillar2 applies even when it felt that multinationals are under taxed. In a nut shell, we may summarize:
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- Pillar 2 has four new rules granting jurisdictions additional taxing rights where other jurisdictions have not exercised their primary taxing rights or income is subject to low rates of tax.
- An Income Inclusion Rule (IIR)
- An undertaxed payment rule
- A subject to tax rule
- The intention for most practical purposes is that these rules should only apply to MNE Groups with a total consolidated group revenue above €750 million or equivalent.
- Work on Pillar Two has greatly advanced towards consensus; the main areas which still need to be resolved are around simplification measures.
- Pillar Two could have a significant impact on the effective tax rates of MNE Groups by itself or in combination with Pillar One.
- Implementation of the rules will likely involve a combination of changes to domestic tax laws and bilateral tax treaties (expected to be via a multilateral convention)
Conclusion
India as a fast rising developing country with excellent receipt of FDI ($) worth hundreds of billions would be very happy to lead all nations under developing and underdeveloped nations category to get Biden’s global reform of tax implemented and give benefits to all countries who actually run the business for giant high- tech companies who try to hide under tax havens or expect nations to fight among themselves to reach the bottom tax rates as low as less than 10%. The current Biden’s proposals or OECD BEPS Pillar 1 and Pillar 2 shall usher in an equitably income dispersed civil community which will benefit the humanity as a whole. The whole world is eagerly awaiting the outcome of the meet of 137 nations/G20 to act on BEPS in coordination with approval of G7 for Biden’s global reform in October/November 2021 for reforming global taxation. India has consistently participated in all international collaboration on tax reforms.
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