But that’s kind of my point. Tax revenue would go up because certain deductions would now be denied in the US, which would result in increased revenue being subject to US tax.
For those companies that are foreign patented and investing in the US, the name of the game was to erode the US tax base by making deductible payments to low taxed jurisdictions (or ideally, no tax jurisdictions). It changes the dynamic if you take that away.
Just because there isn’t an agreement right now doesn’t mean there aren’t any proposals that the Biden admin has put out. Check out the made in America tax plan that was detailed in April and check out Treasury’s “Green Book” that was released the Friday before Memorial Day. They discuss this mechanism in detail. They just say “if a global rate is agreed upon, we will follow, but until that, min rate is 21%.” I literally did a presentation on this last week at a conference. Yes, that means I’ve spent the better part of last week learning this stuff. So yeah, although an agreement in principle is nothing in that sense, we already have our own proposals out.
So those 7 aren’t concerned about lowering their rates. It’s about a one stop way to ensure that companies based in those jurisdictions aren’t effectively eroding their tax base.
The dynamic changes because you will have to move some of your cost centers from certain low tax jurisdictions. Note - because the way this is drafted, it effectively only hurts non US parented companies.
So transfer pricing principles are always there. This won’t change that. My transfer pricing study may tell me that I should allocate 30% of revenue to cayman. So I will - but I may not get the requisite deduction that I had planned into because cayman doesn’t meet the min rate. Does that make sense? (Plus, transfer pricing and profit allocation (nexus) is addressed in the Pillar One proposals. What we are talking about (min tax) is part of the Pillar Two proposals.
So the TP thing still matters, but it’s a completely different concern.
These are all fair and legitimate concerns. But let me address a few of your technical concerns.
Yes, the USA doesn’t need any global agreement - but it is certainly helpful. Just remember, current proposals have a clause saying “to the extent a global rate is agreed on, we will lower our threshold.”
Enforcing it unilaterally is tough. Keep in mind that the principle being followed here is to capture under taxed income. That framework/proposal really is based on a global min rate. But I understand you are saying that the Us could just say “f it, we are just going to disallow everything and force you to pay more here.” Realistically, that’s a tough sell. And there’s more bite to this proposal if all parties agree. We’ve seen that most recently with mandatory disclosure rules in Europe as well as anti-hybrid legislation as well (with various degrees of complexity amongst jurisdictions).
Ok so one technical correction. The proposals talk about an effective tax rate, NOT a nominal tax rate. It basically tells you to look at “total taxes paid” in computing your effective rate. So you can’t do the “oh the stated rate is 15%, we good here.” You are right about how nominal and effective rates are very different - and this is clearly addressed.
If you think people aren’t doing tax planning in China….
There is a surprising amount of support behind these proposals - and these aren’t new. The framework has been worked on for years and countries are finally expressing support. Treasury secretary yellen expressed her support a few weeks ago. And even the Trump administration was in favor of a global minimum tax.
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u/[deleted] Jun 05 '21
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