Swedish Enterprise on the US move on digital tax and global minimum tax

The debate on how to tax so-called digital companies and the introduction of a global minimum tax took a fresh turn the 7^th of April, when the new US administration entered the debate in earnest with its ‘Made In America Tax Plan Report’. The Plan announced proposals for sharply increased corporate taxes, as part of the financing for President Biden’s gigantic infrastructure and transformation programme, costing an estimated $19 trillion, to create a greener economy.

The international battle for tax bases has intensified significantly in the last decade. The digitisation of the economy has made it possible for companies to operate in countries without having any physical presence, in the form of a subsidiary or branch. This absence of a local physical presence means that the country in question is not entitled to tax the company’s activities. This has prompted leading countries, including France as well as others, to call for changes to international tax rules. The OECD has been working with a large number of countries (currently 138) since 2013 to develop new rules to address the tax challenges posed by digitalisation. The plan was to present a solution with the potential for gaining global acceptance by the end of 2020. However, this proved easier said than done; the complexity and the sheer range of proposed political approaches made the negotiations slow. The US has also made it clear that it will not accept rules that specifically target the US digital giants such as Google, Apple, Facebook and Amazon. The protracted international negotiations have prompted a large number of countries to move ahead with their own digital taxes; the EU has threatened to introduce its own digital tax in addition to a digital levy to fund the EU budget.

Last autumn, following intense political pressure, the OECD presented its ‘Blueprints’ for how its proposals for a digital tax (Pillar 1) and a global minimum tax (Pillar 2) could look. As previously highlighted, there has been widespread criticism that the proposals are overly complex and are expected to create a significantly increased level of administration for both businesses and tax authorities.

The Biden administration is now moving ahead in presenting a new approach for a digital tax solution to the 138 countries participating in the OECD effort. The US proposal is that only the 100 largest and most profitable companies should be covered by the new digital tax rules. The proposal would apply to all companies regardless of whether or not they are ‘digital’. According to the US, this would significantly reduce the complexity of any approach and simplify the administration of the regulatory framework. It would also allow the proposal to be implemented without the discriminatory elements. The US is proposing a global minimum tax of 21% under Pillar 2.

So how should we view the US proposals? The OECD’s work on Pillar 1 is based on changing the tax rules in such a way that parts of the profits are deemed to have arisen in the country of sale and not where production takes place and where the head office’s central strategic work is undertaken. The aim is to equalise the distribution of corporate tax revenues between production and market jurisdictions.

Such a direction is clearly not good for a small, open economy such as Sweden, where multinational companies export almost 95% of what is produced. If a proportion of Swedish companies’ profits were taxed in the country of sale, Sweden would risk forfeiting tens of billions of Swedish kronor (SEK) in corporate tax revenue each year. Sweden has not been alone in its opposition to the introduction of such a tax. However, the political pressure is so great that few, if any, believe that this it is still possible to prevent this change.

Having said that, it is probably true that the US proposal to limit the scope to the 100 largest and most profitable companies would undoubtedly mean a real reduction and a simplification at the same time. Moreover, such a formulation would have a limited impact on Swedish companies. This is, of course, no guarantee for the future. Successful implementation may well lead to a gradual lowering of the threshold so that more companies will fall within its remit.

The US prospect of a global minimum tax is more restrictive. The OECD’s aim in introducing a minimum tax has, to date, been to reduce the risk of companies moving their profits around in order to maximise the tax benefits. However, the US move is more an attempt to stop all forms of tax competition, including those activities that have real economic substance and therefore cannot be considered an artificial arrangement.

In addition, the level of a minimum tax of 21% is well above that discussed during the international negotiations. It is not difficult to understand why the US is advocating such a high global minimum tax. This rate is consistent with their own plans to raise the US minimum tax on foreign investment from 10.5% to 21%. By seeking support for a global minimum tax at the same level, the international competitiveness of US companies would be maintained.

The introduction of a global minimum tax will not result in a fair distribution of tax revenues. Furthermore, it represents a major restriction on both the sovereignty and ability of countries to set their own tax rates in line with their economies and preferences. Open and transparent international tax competition, on the other hand, increases the pressure on governments to develop well-designed, competitive rules that in turn will increase investment, jobs and growth.

A minimum tax may appear attractive to large countries with mature economies and above or close to average tax rates. However, for small, open economies such Sweden, where the starting point is that national businesses should be able to compete in foreign markets on the same terms as local companies, the introduction of a minimum tax does not seem as obvious a solution. The same applies to emerging economies, where the infrastructure is not as well developed, therefore making it more difficult to attract investment. These countries are deprived of the means of compensating for higher business costs and for promoting their economic development through attracting foreign investment via lower corporate tax rates.

Unfortunately, following many years of negotiations, most governments seem prepared to throw in the towel and accept the introduction of a global minimum tax. However, given that the range for corporate tax in the EU is between 9% and 30%, I would not bet any money on it being as high as 21%. If nothing else, we can probably count on the Irish Finance Minister - at least - to do what they can to put a halt to such a proposal. Whether it will then be the formal corporate tax rate, or a complicated calculation of the effective tax rate, remains unclear. However, there is a high risk that it will lead to a complicated regulatory framework.