Paul L. Caron

Friday, January 3, 2020

Weekly SSRN Tax Article Review And Roundup: Elkins Reviews Eden's The GloBE Proposal For A Global Minimum Tax

This week, David Elkins (Netanya, visiting Cornell Spring 2020) reviews a new article by Lorraine Eden (Texas A&M), Taxing Multinationals – The GloBE Proposal for a Global Minimum Tax, Bloomberg Tax Daily Tax Report (Dec. 6, 2019), 49 Tax Mgmt. Int'l J. ___ (2020):

Elkins (2018)

One of the recent manifestations of the OECD's war against base erosion, profit shifting, and international tax competition (although the title of its BEPS project refers only to the first two, the last is also a critical element of its campaign) is the Global Anti-Base Erosion Proposal (known by its somewhat forced acronym GloBE). GloBE proposes the imposition of two new types of taxes by the countries that are members of BEPS initiative. The first is a global minimum tax — at a hitherto unspecified rate — on corporate profits. The second is a tax on base erosion payments. In her paper, Prof. Eden discusses the former, which she refers to as GMinTX.

She begins by discussing the current state of affairs. Host countries tax the domestic-source incomes of foreign corporations. The corporation's home country then has the choice of exempting the corporation from further taxation (a territorial system) or, alternatively, of taxing it on its worldwide income and granting a credit for taxes paid in the host country. Countries adopting a system of worldwide taxation effectively require their resident corporations to pay the difference between the tax rate in the source country and the tax rate in the country of residence. 

Prof. Eden then describes an "umbrella effect," under which source countries have an incentive to set their corporate tax rate just under the tax rates prevailing in typical home countries. At that level, the tax does not impose an addition cost on multinationals operating in the source country — their total tax burden is no greater than it would have been in the absence of source country taxation — and will therefore have no deterrent effect on foreign investment. On the other hand, when home countries have a territorial system, the umbrella disappears and the "fresh winds of tax competition" are launched. Because taxes rates affect investment decisions, countries interested in attracting foreign investment will tend to lower their tax rates, leading to a so-called "race to the bottom." The fact that all countries today have either a territorial or a quasi-territorial system, that is, they either exempt their resident corporations from tax on foreign-source earnings or impose upon them an effective tax burden that is less than the ordinary rate of tax applicable to domestic source earnings, is what prompted the BEPS project.

The GMinTX would require home countries to impose a tax on the foreign source income of its resident corporations equal to the difference between the host country tax and the GMinTX rate (e.g., if the host country tax rate is 6% and the GMinTX rate is 10%, the home country would impose a tax of 4%). If adopted, the GMinTX would create an umbrella that would allow source counties to impose tax up to that amount without affecting the attractiveness of those countries as investment venues.

According Prof. Eden, the proposal has a number of costs. The first is loss of sovereignty, as countries may be forced to impose taxes against their will. Prof. Eden points that the GMinTX appears to contradict the position taken by the OECD in its original 2013 BEPS proposal, where it declared that "[n]o or low taxation is not per se a cause of concern." The second is that if the source country is unable or willing to impose corporate tax equal to the GMinTX, the benefits will inure to the home country instead of the host country. The third is that is the GMinTX is set inappropriately or incorrectly or can be manipulated, there can be efficiency and distributional losses. Prof. Eden proposes that the GMinTX rate be set at about 10% and further recommends that those home countries with a worldwide corporate tax regime view the GMinTX as source country tax for the purpose of the foreign tax credit.

Prof. Eden's article provides a good introduction to the GMinTX. However, to my mind there are a number of other important issues that would arise with regard to any attempt to implement a mandatory GMinTX.

First, as I have written elsewhere (here and here), tax competition is necessary to achieving international economic efficiency. Consequently, one of the costs of a fully implemented GMinTX would be a misallocation of global resources and a reduction in aggregate human welfare.

Second, GloBE mandates that the GMinTX be imposed by the country in which the corporation is resident. This raises the extraordinarily complicated and most likely insoluble problem of corporate residence. Which country is supposed to enforce the GMinTX? Does GloBE envision a uniform definition of corporate residence? Or is any country according to whose domestic law the corporation a resident tasked with enforcing the tax?

Third, GloBE presumes that both the host country and the home country will actively enforce the taxes that they impose. Under GMinTX, host countries have every incentive to impose tax (in order to allow corporations investing in their territory to avoid GloBE) but not enforce it (in order to attract investment). It is reasonable to assume that any home country that did follow the guidelines and impose a GMinTX on its domestic corporations would quickly experience a mass — albeit perhaps technical — emigration of corporations: inversion if the criterion is place of incorporation, removal of home offices if the criterion is control and management, and so forth. Therefore, home countries — assuming they can be identified—– may find themselves under international pressure to adopt the tax, but they too have every incentive not to enforce the tax that is formally on their books.

Here’s the rest of this week’s SSRN Tax Roundup:

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