While the Biden administration is hailing the commitment from the Group of Seven wealthy nations to a global minimum tax, actual implementation is still quite a way off on a path fraught with obstacles.
On Saturday, after meeting with the G-7, Treasury Secretary Janet Yellen announced that the finance chiefs had agreed to move forward with a 15% global minimum tax, a policy that President Joe Biden has sought. Yellen called it an “unprecedented commitment,” although many details have not been agreed to and dozens of more countries need to weigh in.
David Sacco, practitioner in residence at the University of New Haven finance department, said that the Saturday news was somewhat of a big deal in the sense that the G-7 countries were all able to agree on the 15% figure, although he pointed out that there are still a lot of details to be hammered out as to how a global minimum tax would be implemented and that it will likely be at least a couple of years before the plan would be effective — that is, if it even ends up being implemented.
The next step in the process is a G-20 meeting in Italy. The G-20 includes the seven wealthy and developed countries that agreed to the 15% concept but also others that might take a little more convincing. Some of the additional countries include China, India, Brazil, and South Africa.
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“We’ll have to convince the other great powers, especially the Asian ones. I am thinking in particular of China,” said France’s finance minister, Bruno Le Maire. “Let’s face it, it’s going to be a tough fight. I am optimistic that we will win it because the G-7 is giving us extremely powerful political momentum.”
Furthermore, a majority of the approximately 140 countries involved in negotiations as part of the Organisation for Economic Co-operation and Development will have to sign off on the plan.
Sacco told the Washington Examiner that the coming negotiations are “battles” and compared them to how different states in America have various differences in their tax codes and try to cannibalize businesses in other states by offering tax breaks. “I just think it’s going to be so difficult to implement,” he said.
The complexity of getting a global minimum tax in place is compounded by the fact that Yellen faces great difficulty in imposing it in the U.S. Congress and would have to hash out exactly how the tax code will change in the United States, and other countries will have to do the same on an individual basis. At the same time, U.S. code and those of other countries will also have to mesh in order to make the global minimum tax universal.
“Think about getting the tax law enacted in the U.S. right now,” Sacco said, pointing out just how evenly divided the House and Senate are politically. Republicans generally oppose the effort. The fact that Biden has already proposed several other changes to the tax code and that the midterm elections could result in a power shift on Capitol Hill could also complicate U.S. approval, and ultimately implementation, of the plan.
Other countries might also watch to see if and how the U.S. tries to implement the plan given the sheer scale of the U.S. economy and the fact that so many of the corporations that would be affected are based in or have significant ties to the U.S.
Elke Asen, a policy analyst at the Tax Foundation’s Center for Global Tax Policy, pointed out to the Washington Examiner that in order to have a functional global minimum tax, countries involved worldwide would have to make the changes to their own national tax codes before it is implemented, a process that she said could take years.
“In the past, the U.S. has been relatively slow when it comes to passing any type of tax treaties,” she said, noting that even some bilateral treaties have taken a long time to pass through Congress.
A global minimum tax would also have to contend with businesses themselves, which have always worked hard to figure out ways around any changes to the tax code.
“The best-case estimates I’ve seen have been saying it’s going to take two years to get all of this legislation passed, and between now and then, every tax lawyer around the world is going to be figuring out ways to get around this,” Sacco said.
“The agreement, let’s say, is 20% of the battle, the implementation is going to be 80% of the battle,” he added. “I think we’re going to see a lot of consternation surrounding those issues.”
Asen said there is also some concern that while the concept of the plan may be the same for different countries, the details might end up being different, which she said would be a major burden in terms of compliance costs and administration.
She said that the U.S. will have a better idea about the likelihood of global implementation later this year after more meetings and discussions with the G-20 and OECD. “There are still a lot of details that need to be worked out before we actually know what this policy would look like,” Asen said.
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The proposed 15% rate agreed to by the G-7 is still higher than the corporate tax rate of some countries, including Ireland, which has a 12.5% rate. Hungary, which has a corporate income tax rate of only 9%, has already pushed back against the notion of a global minimum tax.
Sacco compared the situation of working together with other countries to ensure fair implementation of a global minimum tax to the prisoner’s dilemma. He said that if all the countries are able to work together, it would be fine, but as soon as one country in the chain decides to go in for itself, the whole thing falls apart.
