What in the World Is a Global Minimum Tax?

In 2020 five tech giants  - Apple, Amazon, Google, Microsoft, and Facebook, had a combined revenue of more than $1.2 trillion. It makes sense though right - like, I for one spent a lot of time on my computer that year. 

But many were outraged to learn how little they had paid in taxes. This highlights a story that has been unfolding for decades. As silicon valley moved fast and broke things, they also got really good at finding ways to pay the lowest tax possible - which sometimes is no tax.  

Many of them moved to countries with lower tax rates resulting in a race to the bottom - countries competing with each other to offer lower and lower rates. The result? Hundreds of billions in lost tax revenue around the world. 

Large corporations always seem to be two steps ahead in the tax game. But there may be a surprising change in store - an international proposal to charge companies the same tax rate, no matter where they go. 

I’m Gabrielle Sierra and this is Why It Matters, today, a global minimum tax - the solution that could change it all, and the long road ahead. 

SIERRA: Can you tell me about this new idea called global minimum tax? What is it? How does it work? 

OEI: Generally, a global minimum tax is exactly what it says. 

This is Shuyi Oei. She is a professor at Boston College Law School and teaches students all about the wide world of tax law. 

OEI: It's a minimum tax on corporations. And countries can tax more, but if they tax less, then things happen.

RUBIN: For several years now, the US and more than 100 other countries have been talking to try to find a way to have a more coordinated corporate income tax system around the world.

And this is Richard Rubin. He’s the US tax policy reporter for the Wall Street Journal. 

RUBIN: The idea being that companies would have to pay 15% of their profits in taxes in every country in which they operate, such that the location of where those profits are is less important.   

OEI: The way the current global minimum tax design is being talked about is that there's a 15% global minimum, and by a series of rules, if a country does not put their tax rate at 15%, there's a very complicated mechanism by which other countries can top up and tax the difference. And so then the idea would be, well, the US doesn't want some other country to tax our multinationals on the difference. So it's in our incentive to make our tax 15%. 

Okay let’s break it down - Tax rates vary by location, which is why corporations will look around the globe and try to find countries with lower tax rates. Once they do, they will shift a headquarters, a portion of their operations, or their intellectual property to that location. And of course, this is much easier for a tech or pharmaceutical company than an old school brick-and-mortar business. I mean think about - at one point companies were mostly creating physical goods, and it was extremely difficult to move large machinery and operations across oceans.

But, in this new era, countries with favorable tax rates are places like Ireland, Switzerland, Singapore, the Netherlands, Luxembourg, or Hong Kong.

A global minimum tax would stop this from occurring, establishing one universal floor at 15%. If one country does not adopt a 15% corporate tax rate, but something lower like 5%, then other countries where the company operates, could charge the difference - meaning the company would be paying the minimum no matter where they went. 

RUBIN: The idea is to minimize those gaps to reduce significantly the benefits of the profit shifting that companies can do.

Okay so I know it doesn’t always work out exactly this way, but in theory can you just tell me how companies are technically supposed to be taxed? 

RUBIN: Companies are taxed based on their profits. So, as opposed to you, you're taxed on your income, you get some deductions, but we don't think of individuals as profit making in the same way. For companies, they're taxed on their profits. So, they take the revenue minus their expenses. Those expenses can be wages, those expenses can be office space, those expenses can be the construction of new facilities, all those things that companies do. And they're taxed on the profit, the money that they make in a given year. The basic principle has been you're taxed where value is created, where profit is happening. That's not always a simple thing to translate into reality, into actual dollars. What's been driving a lot of the concern lately is that was a relatively easy to definition to think about 50 to 60 years ago, when you could say, "Okay, well, the automobile factory is in this particular place and this particular country, therefore that's the country that should get to tax that income that that factory is producing." But as the economy has become less tangible, as the things that are generating profits are not factories, they're patents, they're trademarks, they're websites that aren't in any particular place, figuring out where those profits are has become much more difficult for governments.

SIERRA: Is there a global IRS that collects from companies that operate around the world?

OEI: There is no global IRS in the sense that there isn't one central organization that's going to sort of come knocking on the multinational companies door if they don't pay the taxes. Sometimes you'll hear people say that in recent years, the OECD has acted as a de facto world tax organization. 

The OECD, or Organisation for Economic Co-operation and Development, has steered global tax talks. And last October, nearly 140 countries signed onto a tentative deal, but that doesn’t mean it’s across the finish line. For it to work, all signatories have to go home and get it approved through their legislative bodies as well. Implementation is complicated and the details are still being ironed out - what is the compatibility with current domestic tax laws? and what needs to change? This question signals a bigger issue - there are two political battles - one on the international stage and one in each individual country.

OEI: The OECD has taken probably the most active role in the international space. It's making policy, setting norms and standards, putting out models, and then countries adopt that. But there is no central global tax authority. That's generally a matter of domestic law and sovereignty of individual nation states.

Okay so in other words, new technology, IPs, all that, have given companies more flexibility on where they are based. And as companies exercise this new flexibility, there is no centralized oversight. 

This makes it harder to tax corporations as they shift profits around. Let’s talk about why some countries are offering extremely low tax rates in the first place.

OEI: Tax is one of the metrics along which countries compete. And so what the global minimum taxes is trying to solve is that race to the bottom. And so the race to the bottom is countries have an incentive to drive tax rates lower and lower in order to attract taxpayers to residence in their jurisdiction.

SIERRA: Interesting.

OEI: The details are mind bogglingly terrible, but the bare bones idea is that.

Basically countries want big companies to reside in their borders. This isn’t just for bragging rights, but also because it could provide jobs and promote local economic growth.

So to attract a big company, a country will offer a low corporate tax rate. And another country might offer them an even lower rate. And another one… you see where I am going with this - over time countries will go lower and lower to attract big companies to their shores, which creates that race to the bottom and allows companies to pay less and less taxes as they go. And of course this is just one of many ways for corporations to legally work the tax system. There are other ways they do it too, let’s look specifically at the US for a moment.  

OEI: In reality, after the effect of tax loopholes, or tax deductions, or tax incentives, corporations aren't paying a huge amount of tax. The corporate tax rate in the US is supposed to be 21%. What you see is that in actuality, a lot of corporations are probably paying a lot less than that. And so then that feeds into the discourse that they're not effectively paying a 21% tax. 

P.S. You may have noticed that the global minimum tax of 15% is actually lower than the US’s current 21% tax rate. But a reminder that 15% is a floor. 

Plus, the 21% rate is often not fully paid, and the effective rate - the rate companies actually end up paying - is way lower.  

We’ll get into exactly how corporations finegale this in a minute. But the key takeaway for now is that, in most cases, a 15% floor would be higher than what actually gets paid, and it would force the US to tighten our tax laws, otherwise other countries could claim the difference.

OEI: Some of that tax minimization is legal under the tax law, and that's a whole different conversation. But after the application of what one might colloquially call loopholes, the effective rate might be in some circumstances reduced to zero. And that is certainly something we've seen among some corporations in the US.

To give you some examples - a US company might reinvest in growth and development, this would lower their profit margin and they’d have a lower tax liability. Another thing they can do is add solar panels, this would give them a tax credit. These are just two tools to get tax breaks in the US, among countless other tools that companies use to lower their tax bill. And it works. Let’s look at Amazon. This company has become an expert at working the corporate tax system. 

You might remember this, back in 2018, Amazon made a whole bunch of headlines…

https://youtu.be/UJtY4jBMjqI?t=18 

Fox Business: News out that Amazon is paying zero in federal income taxes for the 2nd year in a row. 

https://youtu.be/suxW2CcKyjk?t=41 

Yahoo Finance: Zero, zero, zero dollars, zero in taxes.

https://youtu.be/qNg55JDMDHM?t=46 

CNBC: That massive company paid no federal income tax on more than 11 billion in profits in 2018.

And in following years, Amazon continued to pay far less than the 21% rate. If the Global Minimum Tax became reality, Amazon and other companies would not be able to reduce their tax bill unchecked. 

OEI: Yeah. So, Amazon is a good example because that's a big US multinational corporation. And so, you'd look at that corporation and you'd say, well, you are subject to a 21% rate in the US, but then the question is, so in the US, how much is Amazon paying? And so the way ITEP, Institute for Taxation and Economic Policy, right it’s a think tank, calculated the effective tax rate for 2021 was 6.1%. And looking back over years, 9.4% in 2020. That is based on a certain calculation, but the bottom line is, you're looking at a 21% statutory rate. And then you are trying to back out and say, how much of this income do we estimate as should be the taxable profit base, gee, it's looking a lot less than 21%.

SIERRA: I was going to say, six, nine, those aren't 21. So, it's not even close.

OEI: Yeah.

For decades now, multinational companies have been using all the tools we’ve talked about to lower their taxes, while making record profits. In 2020, 55 of the largest corporations in the US paid $0 in US federal corporate income tax, including FedEx, Nike, and Salesforce. And the kicker, that same year, together these 55 companies got $3.5 billion back from the government through rebates. 

But the biggest shock came from the Silicon Six - Amazon, Facebook, Google’s parent company Alphabet, Netflix, Apple and Microsoft who reportedly have a $100 billion tax gap that grew in the last decade.

Yet, these companies still benefit from the services that tax dollars bring to the societies they operate in, like the tax money used to build schools, to pave roads, to provide healthcare, and to pay for a defense budget. 

The global minimum tax money might help us pay for these exact needs or even allow governments to lower taxes on the individual side or decrease the US deficit. At the end of the day it will be up to the government. 

But ultimately, the global minimum tax would bring in, collectively, $150 billion in additional tax revenue each year.

RUBIN: The corporate income tax is a significant revenue source. It brings in hundreds of billions of dollars a year to the US government. So, as a US taxpayer, or as a taxpayer of any country, you're going to want to care whether corporate income is taxed and how it's taxed. It's also not just important as a dollar amount of revenue source, but because corporations tend to be owned by higher income people, the corporate income tax is one of the more progressive sources of revenue that the government has. The idea is that you create a floor under what companies pay and that provides money to governments to pay for programs.

SIERRA: Does this apply to every company or is it just the biggest ones? 

RUBIN: I think it will be tech companies, pharmaceutical companies, probably some consumer product companies here and there, probably some of the chip makers. And I think probably less so retailers and finance industry companies. 

SIERRA: A lot of those new sectors. 

RUBIN: Right. 

And FYI, this only applies to corporations making over 750 million Euros in annual revenue, that's roughly over $800 million dollars. 

OEI: I think the reason why people talk a lot about tech is that often the customers, the digital users are in different jurisdictions than the plant. And so, you know, the deal will be more salient to those companies, but the terms of the deal don't name specific sectors. So it's literally by revenue. It's just that we are pretty sure that the tech and the pharma company, those big companies will be hit by it.

SIERRA: So, what if a country decides to sit out? Won't that just attract multinational companies, corporations to move there?

RUBIN: Right. So, you need a critical mass of countries in order to make this work. But the way it works is that it's imposed by the country where the company is headquartered. So, if you're a US company, we will look at how much profit you make in each country around the world and will charge you up to 15% to make sure that you're not putting profits in any low tax country. So, if the US does that for its companies and other countries that are part of this deal, France, the UK, Germany, Japan do the same thing for companies that are headquartered in those places, all of a sudden you've got a very significant chunk of global multinational income that's captured by this tax.

SIERRA: So who wants this? Who's pushing hardest for it?

RUBIN: The Biden Administration is pushing very hard for this. And the Biden Administration wants to bring everybody else along so that, as you were talking about, there aren't necessarily opportunities for companies to go elsewhere and have an advantage if they're not a US company. Just as a policy matter, you want to minimize the benefits that a company could get if it were to become a British company or an Australian company or whatever.

RUBIN: And other countries want this too. Other countries, like France and Germany, there are lots of countries that are on board for this.

OEI: The primary drivers of the whole thing at the beginning were the OECD countries and then the G20 came on board. You know I think it's a complicated coalition of stakeholders. Certainly the wealthier global North countries I think are pushing it. So the EU is certainly there. In the Biden administration, the US is certainly there. Although others have argued that the alignment of interest is not completely perfect, right because the US has the big multinationals. And I think the US would like to be getting more tax out of the multinationals, but we wouldn't want someone else to be getting the tax instead of us, right so there's a bit of an interplay there. I think people would argue that it is also good for non-haveney less wealthy countries, like lower income countries. This idea that if you put a 15% minimum on the table, then you're less likely to have tax havens just basically eliminate the base. So less wealthy countries that may need to raise revenue may also benefit.

SIERRA: How do developing countries feel about a global minimum tax?

OEI: First of all, it's a very heterogeneous group. And so you're talking from the BRICS, Brazil, Russia, India, China, to smaller developing countries, lower income countries. There's a whole variety of actors here. I think views are mixed. Many have signed on. It's not entirely clear what's driving it. My own research sort of suggests that there may be a wanting to comply in order to avoid being on some list of naughty actors, right…

SIERRA: Interesting. Yeah.

OEI: …that EU had put together right, but it's very hard to know. Maybe the way to talk about it is I think there is some anxiety about not getting an adequate cut of the deal. So, the worry is, are we going to be forced to abandon some of our tax incentive regimes? That's a general tension with these rules. Are we specifying what the minimum tax is, or are we actively telling countries how they can and cannot design their tax systems?

SIERRA: Yeah.

OEI: And there's some debate over how far it goes and how far it should.

SIERRA: So, I guess my question is where are we at with all this? What's the current status of the global minimum tax?

RUBIN: It's messy right now.

SIERRA: Sounds pretty messy.

RUBIN: It's pretty messy. So, let's take it in two pieces. Abroad, countries are trying to start to go ahead to put their pieces in place. France is leading the EU at the moment and is trying to push this ahead to get European countries to agree on exactly how the system will work and to implement it in the next year or so.

Since we recorded our interviews, Poland blocked a proposal that outlined how to implement the global minimum tax across the EU, this is a major setback. But Europe is not the only place where progress is stalled.

RUBIN: In the US, it’s stalled in Congress as part of the Build Back Better initiative. There's actually not a ton of controversy among Democrats in Congress. Republicans don't like it, but Democrats are basically fine with this piece of the legislation. It's the other parts of the bill that have caused problems. So, if some reconciliation legislation, some fiscal package moves in Congress, I would expect this to be part of it on the democratic side. So, all of that, like the US minimum tax effort, the international minimum tax effort, the idea is that everything sort of marches forward together in coordination and you all know better than me…

SIERRA: How's that going?

RUBIN: The entire world marching forward together in coordination doesn't always work very well. And so that, I think is, I'm not saying it won't happen. I'm just saying it has been a long process and will continue to be a long process with this sort of dance of US legislators looking around the world and saying, "Are you guys really going to do this?" And then the European legislators looking at Congress and saying, "Are you guys really going to do this?" Right? So, I think if everyone, you know, holds hands and leaps, then it works.

SIERRA: I was going to say, it's like getting dared to jump into a pool or something.

RUBIN: Yeah. 

SIERRA: Yeah.

RUBIN: But if it starts being very clear that it falls apart … So if for example, if we get to January 2023 and at least one chamber of Congress is in Republican hands and this hasn't moved through Congress, European countries are going to be very skeptical about the Biden Administration's ability to deliver on this.

SIERRA: Okay.

RUBIN: Yeah. So, it is you can't put that in the podcast.

SIERRA: Oh, I can't put your shrug?

RUBIN: You can't put my crazy shrug in my podcast. But I've been covering several years and I've just ...

SIERRA: Crazy shrug.

RUBIN: Crazy shrug. Yeah.

There is an uphill battle ahead, and what is at stake goes far beyond our government’s revenue stream. 

https://youtu.be/VnwRodMiBwA?t=25 

CODEPINK: Hey-He-Ho-Ho tax evaders have got to go! Hey-He-Ho-Ho tax evaders have got to go!

SIERRA: So closing out, we live in an atmosphere of frustration with financial inequality and a lot of criticism of unfair advantages for corporations, and of course, the super wealthy, a lot of people feel like it's a rigged game. Do you think that if this worked out and companies were paying taxes more equally, and governments were gaining more revenue, that it might help repair some of the trust that's been lost between citizens and corporations?

OEI: Yeah. That's certainly the hope, I think the hope is if you're seeing your biggest companies pay a larger share of their profits in taxes, and you're less hearing about them hiding profits offshore, or putting them in low tax jurisdictions instead of bringing them home, that contributes to a feeling of democratic quality in the country. I think that's certainly the hope. Of course, now as a tax person, I have to say, well, you have to worry about things like incidents, does the corporation pass on the tax burden to shareholders or to workers? I don't know. Right. But certainly in terms of morale building, I think a non-trivial part of the exercise of taxing is building citizenship. So this idea that wealthy companies and wealthy individuals, right are paying a fair share I think certainly can't hurt. 

For resources used in this episode and more information, visit CFR.org/whyitmatters and take a look at the show notes.

Have a question or some feedback? Just feel like saying hi? Send us an email at [email protected]. 

Subscribe to the show on Apple Podcasts, Spotify, Stitcher, or wherever you get your audio. And if you are a fan, we’d love it if you could leave us a review. Ideally a good one, the more stars the better. It really does help us get noticed and we really do appreciate it.

Why It Matters is a production of the Council on Foreign Relations. The show is produced by Asher Ross and me, Gabrielle Sierra. Our sound designer is Markus Zakaria. Rafaela Siewert is our associate podcast producer. Our intern this semester is Roshni Rangwani.

Robert McMahon is our Managing Editor, and Doug Halsey is our Chief Digital Officer. Extra help for this episode was provided by James McBride and Kali Robinson. 

Original music is composed by Ceiri Torjussen. Special thanks go to Richard Haass, Jeff Reinke and our co-creator Jeremy Sherlick. 

For Why It Matters, this is Gabrielle Sierra signing off. See you soon!