Joe Biden proposed a new minimum tax on the earnings of U.S. companies abroad as part of a greater tax plan to reform the current US tax system. The idea of a minimum corporate income tax would react to the tax avoidance schemes used by the biggest US companies, as they often divert their earnings into jurisdictions with low or zero corporate income tax (“CIT”) rate causing millions of dollars in revenue loss for the US. However, the plan of a minimum CIT rate is on the table for a long time, its introduction, timing and details are not left without criticism.
In the global economy there is a trend that countries tend to lower their CIT rate to attract foreign investments. Though the lower tax rate can be, in theory, beneficial for the domestic country, neighbouring countries will likely be lowering their CIT rate too, causing a so-called “race to the bottom”. According to the US Treasury Department it is estimated that over 3 trillions of dollars remain untaxed overseas thanks to the tax planning and tax avoidance schemes used by large companies such as Facebook, Google or Amazon. Furthermore, the abovementioned “tax race” causes serious losses also in the world economy.
The core of the current proposal is that US companies would have to pay 21% corporate income tax on their foreign earnings that would double the current tax rate (compared to the 10.5% and 13% that they have to pay now), and would also eliminate the tax exemption for the first 10% earning when investing abroad. Based on information to date, this tax could act as an incentive too, as it would still be less than the also planned 28% domestic CIT rate.
There are two estimated effects of this proposed tax system. On one hand it would undermine the attractiveness of modern tax havens (e.g. Bermuda, where currently 0% CIT rate is applied) and countries with low corporate income tax (e.g. Ireland). On the other hand, it would redirect an enormous amount of tax income to the US treasury, enabling financial and infrastructural reforms post-COVID.
Supporters of the proposal outline that by enacting minimum corporate income taxes it is expected that harmful tax-race can be slowed and the amount of taxable profit could be increased significantly. Opposers state however, that timing of the Biden Tax Plan is unfortunate, as businesses are still struggling to return to their pre-COVID state in terms of profitability.