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):

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:

• Kodzovi Abalo (Penn State), Quantifying the Incidence of A Global Oil Price Shock in Nigeria: A Roy Model With Non-Homothetic Preferences And Endogenous Transfers (2019)
• Kingsley Ndonwi Ambe (Independent), The Tax Regime in Cameroon and The Responsibilities of Cameroonians Toward Fiscal Tax Allocations (2019)
• Danielle Chaim (Student, Columbia), The Perils of Common Ownership: Flooding Strategy (2019)
• Kathryn Chan (Victoria), Constitutionalizing the Registered Charity Regime: Reflections on Canada Without Poverty v Canada (AG), __ Canadian J. Comp. & Contemporary L. __ (2020) (forthcoming)
• Eric D. Chason (William & Mary), Cryptocurrency Hard Forks and Revenue Ruling 2019-24, 39 Va. Tax Rev. 2 (2019)
• Kimberly A. Clausing (Reed), How Big is Profit Shifting? (2020)
• Michael D'Ascenzo (UNSW), Australian VAT Design and Federalism (2019)
• Chris Edwards (Cato Institute), Taxing Wealth and Capital Income, 85 Cato Institute Tax & Budget Bull. 1 (2019)
• David Elkins (Netanya), A Critical Reassessment of the Role of Neutrality in International Taxation, 40 Nw. J. Int'l L. & Bus. 1 (2019)
• Johann Hattingh (Cape Town), Legal Considerations Arising from the Use of Memoranda of Understanding in Bilateral Tax Treaty Relations, Contemporary Tax Issues (forthcoming) (2019)
• Regina Herzlinger (Harvard) & Barak D. Richman (Duke), Thinking Outside the Box (12): The Benefits of Increased Transparency in Employer-Sponsored Health Insurance for the 180 Million Insured (2019)
• Shaho Heidari Gandoman (Islamic Azad), The Impact of the Financial Crisis on Tax Avoidance around the Global Financial Crisis in the Companies Accepted in Tehran Stock Exchange (2019)
• Phil Lord (McGill), Feudalism 2.0 (2019)
• Elaine Maag (Urban Institute), Donald B. Marron (Urban Institute) & Erin Huffer (Urban Institute), Redesigning the EITC: Issues in Design, Eligibility, Delivery, and Administration (2019)
• Michael Maizels (no affiliation provided) & William E. Foster (Arkansas), The Gallerist's Gambit: Financial Innovation, Tax Law, and the Making of the Contemporary Art Market, 42 Colum. J. L. & Arts 2 (2019)
• William G. Najmy  (student, Stetson), Enhanced Tax Compliance for Cryptoasset Transactions (2019)
• Nnachi Dickson Okoro (Nigerian Bar), Application of Nigerian Value Added Tax on Services: Judicial Interpretations (2019)
• Marius van Oordt (African Tax Institute) & Richard Krever (Western Australia), Legal Uncertainty in the South African VAT, in Chris Evans, Riel Franzsen & Elizabeth (Lilla) Stack (eds.), Tax Simplification: An African Perspective 160 (2019)
• Suresh Kumar Oad Rajput (Sukkur IBA) & Jahanzeb Marwat (Sukkur IBA), Tax Avoidance and Earning Management in Pakistan (2019)
• John A. Townsend (Townsend & Jones), Burden of Proof in Tax Cases: Valuation and Ranges – An Update, __ Tax Law. __ (2020) (forthcoming)
• Dennis J. Ventry (UC Davis), False Claims in Fight Over California's False Claims Act, Tax Notes State (2019)