Trump discovers global cooperation isn’t so bad—at least on taxing corporate giants

Trump celebrates the six-month anniversary of his tax cut, which may have propelled the US to opening the world to tax reform.
Trump celebrates the six-month anniversary of his tax cut, which may have propelled the US to opening the world to tax reform.
Image: Patsy Lynch/MediaPunch /IPX
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Something unprecedented happened last weekend: The G20 finance ministers signed a plan to figure out how to fairly tax the world’s biggest companies by 2020—and the United States didn’t block it.

“Frankly speaking, this is big. This is massive,” Pascal Saint-Amans, tax chief at the Organization for Economic Cooperation and Development (OECD), which is convening global tax negotiations, said of the change in US stance in an interview with Quartz last week.

Big economies have been pushing for years to stop corporate behemoths, like Apple and Google, from shifting their profits to tax havens like Ireland, where they pay almost nothing. But they’ve had little success. While the likes of India have taken increasingly radical measures to pressure the OECD, Saint-Amans said the source of the new momentum is actually Washington’s newfound openness to finding a global answer to the problem.

America’s readiness to work with other countries on how to split corporate profits is a “seismic shift,” said Mindy Herzfeld, a tax law professor at the University of Florida. ”It’s kind of ironic,” she said. While the globalist Obama administration aggressively tried o narrow the scope of previous tax reforms, the vehemently unilateralist Trump administration has fully engaged on the issue.

Plus ça change

The current global corporate tax system, known as the “arm’s length principle,” allows companies to pay taxes either where their headquarters or their intellectual property are based—often a jurisdiction expressly chosen for its willingness to bend to corporate demands. But the handful of policies now okayed by the G20 all offer various ways to tax firms based partly on where the companies are actually making money. More than 100 countries will now spend the next year debating three policy choices. All three offer varying degrees of help to developing countries—where digital firms have a lot of users but pay no tax—and to massive markets like the United States.

From the outside, the policy backed by the United States seems meager. The US Treasury’s tax chief said last week (June 6) that developing countries should accept a new system where they could only tax multinationals on extra profits that the firms hadn’t expected to make. He admitted that the plan, itself based on a proposal by pharma giant Johnson & Johnson, wouldn’t actually change how much multinationals pay in “many, many cases.”

But Saint-Amans argues that even this is a major turnaround. He said the United States has gone from saying, ‘The arms-length principal is God on Earth,” to, “The arms-length principal is not God on Earth.'”

While she agrees that its newfound willingness to negotiate is a big deal, Herzfeld disputes that the actual shift in what the US is offering is anything “Earth-shattering.”

“I think it’s a pretty hard-nosed decision from a US perspective,” she said, explaining that US multinationals now complain that other countries target them for audits with the explicit aim of getting a certain amount of money out of them, whether they owe it or not. “[Multinationals] go to the United States saying, ‘You’ve got to fix this for me, we’re being taxed all over.’ So, the United States had to give up some taxing rights.”

The new US approach, Herzfeld argued, essentially takes the money that US companies are already paying to various countries through audits and offers it to them as a formal tax. “So, the United States doesn’t necessarily see this as a net revenue loser, either for the US Treasury or multinationals,” she said.

Why the shift?

Saint-Amans says America’s about-face was spurred by US president Donald Trump’s 2017 tax cut. The legislation offered American firms a controversial tax holiday to bring that money onshore and insisted that, from now on, all American companies would pay a 10.5% minimum tax on profits booked offshore. The law slashed the rate for profits booked in the United States from 35% to 21%.

That move doesn’t seem to have made much of an improvement on US business tax revenues. When Trump slashed the corporate tax rate, revenues fell by 31% and 60 of the Fortune 500 paid no tax at all. The law’s critics point out that it encourages firms to move their profits to tax havens, where they can pay half the onshore rate. Big companies are using the extra pools of cash to buy back shares rather than reinvesting it in the economy. OECD tax chief Saint-Amans believes that America’s struggles to recuperate money from those giants propelled Washington to push for global reform.

But Herzfeld argues the tax cut was just one of a “multitude of factors,” including multinationals’ wish to stop aggressive audits and unilateral moves by the likes of India and France to introduce their own systems. The tax cut’s main impact on US international policy, she said, has been on America’s push for the rest of the world to adopt its 10.5% minimum tax—which would have no downside for Washington.

Will anything actually change?

Activists for tax redistribution to poorer countries have a more cynical take on how America ended up cooperating internationally. Alex Cobham, CEO of the Tax Justice Network, a policy and advocacy non-profit, told Quartz the Trump administration “didn’t really understand what they were doing” when they opened up the debate, and that they were surprised to find other countries saying, “we’re really happy you’ve opened this up and decided to go beyond arm’s-length, and we’ve got other ideas.”

For that reason, Cobham said he wouldn’t be surprised if the United States gets “cold feet” in the next six months and starts pulling out. Washington has done so before, he noted. After the Obama administration passed a 2010 law forcing foreign countries to hand over tax information on US citizens so it could crack down on illegal tax evasion, it started a global push to tackle the issue. And then backtracked, refusing to sign up to the mutual information-sharing agreement backed by almost everyone else.

That’s far from the only potential impediment to a deal. Saint-Amans conceded, “I’m not sure we’ll be able to bridge the gap” between the United States and developing countries’ policies, but added: “At least we have the building blocks to do so.”

Even if a deal is passed, there’s no guarantee of getting a tax treaty through Congress.

“The United States has had a backlog of tax treaties that haven’t been able to get through the Senate for about 10 years now,” Herzfeld said, noting that these include a treaty with Luxembourg that is “heavily in the United States’ favor.”

Whatever the case, there’s a lot of pressure on the OECD to find a solution. If they don’t, India’s calls to move tax discussions to the United Nations will only get louder.

“The OECD simply cannot fail and have legitimacy,” Herzfeld said. They may have to resort to producing a deal with little substance and a lot of symbolism, she said, but “they will absolutely reach a compromise on something—they have to.”