President Joe Biden has proposed sweeping global tax reforms that would limit the ability of multinational corporations to shift profits overseas, while taking steps to forge a landmark agreement on a worldwide minimum tax rate.
The proposals are designed to tackle the very low rates of tax paid by the digital giants Google, Facebook and Apple, and major brands like Nike and Starbucks, which have become adept at using complicated webs of companies to shift profits out of major markets such as the UK, where most of their revenues are earned, and into low tax jurisdictions like Ireland and the Caribbean. Economists estimate that the sums lost to exchequers around the world from profit shifting have risen as high as $427bn (£311bn).
The Biden plan, described as “seismic” in its potential impact, is seen as a dramatic shift, distancing the US from decades of prioritising the tax sovereignty of nations. The world’s largest economy has long resisted calls for the global treaties that tax reformers argued were needed to ensure powerful multinational companies paid their fair share of taxes.
Under the plan promoted by Washington, set out in a document sent to 135 countries negotiating tax reforms at the OECD on Wednesday, tech companies and large conglomerates would be forced to pay taxes to national governments based on the sales they generate in each country, irrespective of where they are based.
The Biden administration also threw its weight behind work to establish a global minimum tax rate, which would see some of the world’s biggest economies agree on a minimum rate of tax on company profits. The current rate of corporation tax in the US is 21%, compared with 19% in the UK and 12.5% in Ireland, one of the lowest among EU nations.
Countries could impose higher corporation tax rates, but not go below the agreed threshold. The agreement is designed to stop countries luring businesses by offering tax discounts.
Pascal Saint-Amans, head of tax administration at the OECD, told the Guardian the Biden plan had potential to be transformative, although several stages of negotiations still remained. “What the US has put on the table … [is saying] we want rest of world to follow, we kill tax havens. The game is over. Let’s move to a minimum agreed level.
“Countries want a solution. They want to get out of controversies and want to move on.”
The plan comes as the White House seeks to launch a $2tn (£1.5tn) infrastructure programme to cement the economic recovery from Covid, funded with plans to increase the US corporate tax rate from 21% to 28%. The increase would reverse cuts pushed through by Donald Trump. Officials estimate the increase would raise $2.5tn over 15 years.
Biden however, is expected to face stiff opposition from Republicans and would need cross-party support to steer the plan through a Congress which is split 50-50. In a sign of the challenge facing the president, the centrist Democrat senator Joe Manchin has already said he would favour a 25% corporate tax rate, rather than 28%.
The proposals to the OECD came after G20 finance ministers agreed on Wednesday to make progress on seeking an international consensus on tackling tax avoidance.
They intend to work towards a deal through the forum of the OECD, with hopes of an agreement to overhaul the global tax system in time for a July summit of G20 finance ministers.
Biden’s plans support the core reforms already drafted by the OECD.
Saint-Amans said the US plan would affect about 100 of the world’s biggest companies, including tech giants such as Google, Apple and Amazon. The exact threshold for company profits, and the rate of corporate tax that would be levied, has yet to be agreed.
Tax campaigners said the US intervention marked a dramatic shift in Washington and raised the prospect of the most substantial tax reforms for more than a century being agreed by world leaders from as early as this summer.
Paul Monaghan, chief executive of the Tax Mark campaign group, said: “The impact on the likes of Amazon, Apple, Facebook and Google would be seismic … with billions of additional taxes paid in both the US and across Europe.”
Frustrated by a lack of progress after years of negotiations, several countries including the UK and France have launched unilateral digital services taxes in response to rising public anger over the taxes paid by multinationals and tech firms – while promising to drop them should a global agreement be reached.
Anneliese Dodds, the shadow chancellor, said the move by Biden was welcome and that the UK government now needed to play its part. She said a deal on global tax reforms was long overdue and was especially necessary “ to level the playing field between businesses based on bricks and businesses based on clicks to help deliver a brighter future for our high streets.”