Biden’s modest tax proposal
From a legal perspective, Biden’s proposal is a step forward. It gives multinationals the status of legal subjects; previously, jurisdictions only treated their subsidiaries, individually and independently, as legal entities.
In 2017 Google channelled $23bn of income to its accounts in Bermuda alone, via various tax havens. In France that year, the company’s corporate income tax bill was just €14.1m; officially, its 700 executives in France made no sales there, but only assisted Google’s Irish subsidiary (its EU headquarters are in Dublin), which kept the accounts in this European tax haven. Meanwhile, online retail giant Amazon avoids federal corporate income tax in the US year after year and declares losses in Europe, even though its profits have soared during the pandemic. Investigative journalists at ProPublica confirmed this spring that famous billionaires such as Jeff Bezos, Michael Bloomberg, Warren Buffett, Carl Icahn, Elon Musk and George Soros have used every legal loophole available to pay little or no personal income tax in the US.
Only the multinationals’ closest ally, the US, seems able to stand up to them on taxation and foreign investment. And only President Biden’s plea to his G7 partners for a universal 15% tax on multinationals’ consolidated income (the combined income of all their subsidiaries) got his fellow leaders — usually slow to react — to fall into line. A far cry from the vacuous claim by then French president Nicolas Sarkozy at the 2009 G20 that ‘tax havens and banking secrecy are a thing of the past.’
The proposed rate of 15% for this new universal tax is low, even derisory; it’s barely as much as the tip restaurant customers usually leave in the US. However, it does illustrate an enduring paradox: the US president is often more powerful on the global stage than at home. While Biden got foreign leaders to accept his proposal without resistance, he couldn’t convince congressional Republicans to raise the US corporate tax rate to 21% (he’d initially aimed for 28%). And even that was a modest ambition: it was 35% when Donald Trump took office in January 2017.
In recent years, all major OECD (Organisation for Economic Cooperation and Development) countries have reduced their corporate tax rates, seeking to emulate tax havens rather than tackle them. In Germany, Canada, France and Scandinavia, the official rate was brought down well below 30% during the 2010s. And multinationals have stepped up their schemes to reduce it still further.
Different rules for multinationals
Economist Thomas Piketty rightly argues that introducing such a low rate, sanctioned by states themselves, appears to enshrine multinationals’ privileged tax status. ‘By establishing that multinationals can continue to freely locate their profits in tax havens, without being taxed above 15%,’ he wrote in Le Monde on 12 June, ‘the G7 is formalising a world in which oligarchs structurally pay less tax than the rest of the population.’ And the countries of the South will see no benefit from the arrangement; they will still derive little income from the international tax system since their trade is largely in raw materials, which generate small profits and little tax revenue.
Even so, from a legal rather than a revenue perspective, Biden’s proposal is a step forward. It gives multinationals the status of legal subjects; previously, jurisdictions only treated their subsidiaries, individually and independently, as legal entities. Multinationals, since they first appeared 100 years ago, have abused this trend towards legal fragmentation. They have used transfer pricing and trademark licensing arrangements, deploying accounting sleight-of-hand to shift profits where they will be taxed least and employing shell structures in tax havens to accumulate income not declared elsewhere. In 2012 Starbucks representatives told British politicians they had made no profit in the UK because of the royalties on intellectual property they had to pay to other entities within the same group (located in tax havens), which held a host of patents and usage rights. These costs were deducted from income, enabling the business to declare a loss and avoided taxation.
Technically, the G7 decision partly short-circuits the role of tax havens, as multinationals will now be taxed on all their profits, irrespective of which subsidiary holds the funds and where it is. Even if a large agribusiness, IT or energy company allocates its intellectual property rights or certain income to entities in Bermuda, Ireland or Luxembourg, they will still be subject to this tax. With these foundations in place, the big challenge now becomes raising the rate.
Biden’s approach demonstrates that international taxation is a political matter, even if others have tried to reduce it to mere accounting. Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration, may now be boasting he was the architect of these agreements, yet for years he took a diametrically opposed position, claiming the issue required a technical, mathematical solution, and it would require a herculean effort to harmonise 200 countries’ tax regimes. In interviews, he also insisted that ‘harmonising corporate taxes globally ... would run counter to the principle of state sovereignty’. With one declaration, the US has swept this argument aside. It’s not technical advances in international accounting that drive policy, but policies that force changes in accounting practice.
Tax havens are a political and diplomatic issue too. States create them by passing legislation that neutralises laws passed in other jurisdictions, in the states where big business and wealthy individuals actually operate. Governments interfere in the affairs of other states: the Bahamian parliament has created a category of ‘exempted companies’ which do not have to pay income tax or disclose their directors’ identities, provided they don’t do business in the Bahamas. This means they can only register capital earned abroad. Effectively, the Bahamas is legislating for how capital will be handled and taxed everywhere except the Bahamas.
Ireland’s ‘selective tax breaks’
When EU competition commissioner Margrethe Vestager — going counter to the EU’s direction of travel — tried in 2016 to end the ‘selective tax breaks’ Ireland gives to tech giant Apple, she defined Ireland’s role as a tax haven in a way that could also be applied to other tax havens. She argued that by setting the corporate tax rate for companies that operated across Europe, not just domestically, Ireland was abusing its legislative power and interfering in other states’ affairs. The Commission’s 2016 decision — imposing a recovery order on Apple for €13bn in unpaid taxes — was ultimately overturned in 2020 by the General Court of the European Union. Nevertheless, it helped define offshore legislation and opened the door to the measures Biden is now promoting.
Rather than lead an international campaign against all those countries that, like Ireland, abuse their power, the US convinced the G7 to adopt a principle that renders their tax breaks inoperative: recognising multinationals as legal subjects in their own right. It remains hard to predict the effectiveness of these measures, but two criteria will give some indication of whether they are working.
The first indicator is foreign direct investment (FDI): if intra-group pseudo-transactions, which artificially make the Cayman Islands, Luxembourg or Delaware major international financial centres, do not decrease, that will indicate companies are still finding ways to conceal assets in tax havens. The second is that companies should logically pay more tax in the states where they operate. Currently, corporate tax only accounts for about 5% of the tax base in France or Germany. And these figures include tax paid by small and medium enterprises, which have few tax avoidance options. By comparison, taxes on consumption and personal income contribute 60-65%.
It’s worth remembering that tax is just one aspect of the much wider problem of lax jurisdictions. These make it possible to circumvent not just the tax laws of the states in which companies operate, but laws of all sorts. Free trade zones and freeports escape the control of labour legislation, while other regulatory havens — such as the Cayman Islands for stock market speculation, the Marshall Islands for oil exploitation, and Canada for mining — shield groups with entities registered there from environmental and human rights laws.
As far as human rights are concerned, multinationals are known for their skill in securing acquittals when one of their subsidiaries around the world is involved in a scandal. Too often, a judge fails to condemn a parent company for what one of its (legally independent) subsidiaries has done abroad. In 2013 a court in The Hague failed to condemn Shell’s parent company (which has its headquarters in the Netherlands) for causing serious environmental damage in Nigeria; all the blame fell on its subsidiary.
Worryingly, the US seems the only country capable of enabling — or perhaps one day ending — this type of tax measure. The EU has failed to stop the offshore phenomenon among its own members and has shaped Europe according to the logic of globalisation, allowing Romania to develop its Free Zones, Malta its Freeport, Ireland and the Netherlands to become regulatory havens and Luxembourg a supermarket for lax legislation.
- Alain Deneault is a professor of philosophy at the Université de Moncton, New Brunswick. His books include Mediocracy: the Politics of the Extreme Centre, Between the Lines, Toronto, 2018, and Legalizing Theft: a Short Guide to Tax Havens, Fernwood Publishing, Nova Scotia, 2018. Translated by George Miller.
Copyright ©2021 Le Monde diplomatique — used by permission of Agence Global