Can President Biden’s new Made in America Tax Plan halt the race to the bottom for international corporate tax rates? ICAEW’s Tax Faculty outlines the proposals.
The US Department of the Treasury has published further details of the Made in America Tax Plan announced by President Biden last week and with this comes hope of a solution to the ongoing deadlock in long-running OECD discussions on corporate tax rates.
The plans goal is to make American companies and workers more competitive by:
- eliminating incentives to offshore investment,
- substantially reducing profit shifting,
- countering tax competition on corporate rates, and
- providing tax preferences for clean energy production.
The starting point would address corporate tax revenue by reducing the incentives for corporations to shift their production and profits overseas.
One of the key proposals would raise the corporate income tax rate from 21% to 28%, a rate much higher than the global minimum corporate tax rate currently being discussed in relation to the work on OECD BEPS 2.0 Pillar Two.
According to the Treasury report, recently the effective tax rate on US profits of US multinationals, the share of profits they actually pay in federal income taxes, has been just 7.8%.
To summarise, the key elements of the Made in America Tax Plan reform corporate tax would:
- Raise the corporate income tax rate to 28%.
- Strengthen the global minimum tax for US multinational corporations.
- Reduce incentives for foreign jurisdictions to maintain ultra-low corporate tax rates by encouraging global adoption of robust minimum taxes.
- Enact a 15% minimum tax on book income of large companies that report high profits, but have little taxable income.
- Replace flawed incentives that reward excess profits from intangible assets with more generous incentives for new research and development.
- Replace fossil fuel subsidies with incentives for clean energy production.
- Ramp up enforcement to address corporate tax avoidance.
The move to encourage cleaner energy will be welcome by those looking to improve the US approach to combatting climate change. Regarding tax changes, it is worth noting that achieving a collective agreement is not easy; for example, while any new EU-wide taxes require the unanimous approval of all its 27 member states, agreement through the OECD involves 135 countries and so could possibly be even more challenging to achieve.
Many countries, such as Ireland, the Netherlands and Luxembourg, currently chose to set their own corporate rate at a much lower level making them attractive bases for some of the world’s largest corporations.
- Background to OECD initiative on international corporate taxation (TAXline, March 2020)
- Made in America Tax Plan
Future of Tax
As HMRC launches its review of the system that underpins the tax system, we take a look at the pressing issues and challenges.
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- HMRC needs more resource to rebuild the UK's tax system
- Identification and registration of taxpayers must be a priority, says ICAEW
- In-year tax estimates wouldn’t be an accurate basis for payment, warns ICAEW
- Join up HMRC systems to provide a better taxpayer experience, says ICAEW
- HMRC consults on measures to protect taxpayers claiming repayments
- Get ready to file plastic packaging tax returns
- HMRC updates guidance on accounts for non-resident corporate landlords
- Employers: check flexible benefit packages are tax compliant
- R&D tax credits: further clarification on compliance checks
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