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The global community inched forward last week in its return to more normal multilateral relations with an agreement among the G7 nations to support a global minimum corporate income tax. The idea has been under discussion for years, but the Biden Administration's move toward the center allowed a consensus to emerge on a plan to address offshore corporate tax dodging and the disparity in taxation of digital commerce. Now the hard work begins.

With increasing globalization, the antiquated patchwork of corporate tax rules has resulted in two fundamental points of contention among nations.

First is the incentivization for multinational corporations to relocate their headquarters to or establish shell operations in low-tax havens to avoid taxes back home. For example, many US companies have shifted their country of domicile to foreign countries with lower corporate tax rates. Ireland, with a tax rate of 12.5%, has become a favorite place for American companies to plant a flag, but other countries aggressively attract corporate expatriation as well. According to the Washington Post, from 2000 to 2018 one half of all foreign profits of US corporations were reported in just 7 countries: Bermuda, the Caymans, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland. The US Treasury Department says the moves cost Americans $100 billion per year in lost tax revenue.

The second issue is also contentious: taxation of digital commerce. In general, countries tax multinational corporations based upon physical assets within their borders like factories, distribution facilities or retail outlets. This system does not address the taxation of large digital companies like Facebook, Google and Amazon who can transact easily across borders with little physical footprint and generate little tax revenue in many countries whose residents are customers. This has led to increasing tension between the US, which hosts and taxes most of these companies, and other governments who are not currently taxing these transactions. Several European nations have either initiated or threatened to levy so-called "digital services" taxes on these tech giants. One can imagine this regime getting out of hand as nations impose individual overlapping imposts. The US has threatened trade sanctions in response.

As these issues have simmered, negotiations over a more coordinated global system have been ongoing for years. The G20 group of nations and the Organization for Economic Cooperation and Development (OECD) have been working on a proposed framework to tackle the issues of tax base shifting and digital services taxation. The recent agreement by the G7 wealthy nations to support a coordinated tax scheme is an important step toward a broader agreement among the 140 nations in the OECD.

There is irony here. There is really no "corporate" income tax. Taxes are ultimately paid by humans to whom corporations pass them on. This means that the true incidence of taxation (he who actually foots the bill) falls upon stockholders in the form of lower dividends and capital gains, and upon workers in the form of higher prices and lower wages. Also note that many workers are also shareholders in 401(k) and pension plans. Economists debate the split, but a reasonable estimate is that shareholders and workers share the burden about equally. Taxing corporations has long been recognized by economists as inefficient, but few individual taxpayers fully understand that they ultimately pay the cost, and the fallacious idea of taxing "wealthy corporations" has obvious popular appeal.

Assuming corporate taxes are here to stay, it is increasingly important to harmonize the international framework to minimize the misallocation of resources toward evading taxes. The G7 communique proposes a 15% minimum tax rate on foreign profits and calls for a new method of taxing large tech companies based upon where they sell rather than where they are located. President Biden had originally sought a 21% floor but agreed last week to the compromise that unstuck the negotiations.

Many challenges lie ahead. The G7 must sell the deal to the larger G20 group, including China, at its July meeting in Italy, and then ultimately to the OECD. And any changes in the US tax code must be adopted by a closely divided Congress. But the progress is encouraging and a hopeful sign the America is back as a reliable partner in multilateral relations.

Christopher A. Hopkins is a Chartered Financial Analyst (CFA) in Chattanooga.

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