New US Administration Adds To OECD Momentum

The OECD’s Anti-Tax Competition Agenda

Recognising its importance for global economic growth, the OECD began over half a century ago with a goal of facilitating trade and addressing problems like double taxation that can arise from cross-border economic activity. But thanks to ideological capture by European tax collectors and the steady march of mission creep, today’s OECD is now concerned primarily with extracting as much “revenue” as possible from the productive sector of the economy.

In the 1990s, high tax nations identified tax competition as a threat to their ambitions. The ability of taxpayers to flee oppressive tax regimes for those with lower burdens, and often also better and more efficient regulatory environments, acted as a soft cap on effective local tax rates and, in particular, on corporate income taxes. But the effort, culminating in a report called “Harmful Tax Competition: An Emerging Global Issue” proved to be too aggressive and led to a backlash from the US—after the election of George W. Bush—and targeted low-tax jurisdictions.

The setback proved temporary, thanks in part to the OECD’s growing awareness of the need to couch its agenda in less radical terms. Instead of taking tax competition head on, it worked for years through a series of proxy issues—money laundering, tax evasion, base erosion and profit shifting (BEPS)—to slowly chip away at tax competition’s foundation of support.

By the time the BEPS project began in 2012, the OECD was feeling emboldened to take more aggressive action. The BEPS Action Plan even gave up the game with this stunning admission: “While it may be difficult to determine which country has in fact lost tax revenue, because the laws of each country involved have been followed, there is a reduction of the overall tax paid by all parties involved as a whole, which harms competition, economic efficiency, transparency and fairness”.

The statement offers two significant revelations. First, the OECD admitted that they did not care whether there was any evidence of actual base erosion. In fact, corporate tax revenues as a share of global GDP saw little change over recent decades, thanks to positive economic feedback from a less burdensome tax environment, even as average corporate tax rates significantly declined. Chris Edwards of the Cato Institute recently looked at 22 OECD countries with consistent data going back to 1980 to calculate average corporate taxes as a per cent of GDP. He found that “the average rate fell from 47 per cent in 1980 to 25 per cent in 2019… But corporate tax revenues are up substantially since the 1980s. Corporate tax revenues for the 22 countries rose from 2.2 per cent in 1980 to 3.0 per cent in 2019”[i].

Second, the OECD clearly laid out an ideologically driven preference regarding domestic tax policies. It was their explicit view that low tax burdens, even if they do not reduce overall government revenues, are presumptively harmful and even somehow unfair. No longer would it be presumed that nations had the right to self-determination. They must be made to implement the preferred policies of bureaucrats from high-tax welfare states.

Over the course of three decades, the OECD moved the goal posts over and over. Nations must provide taxpayer information upon request. Then nations must provide taxpayer information automatically. Then nations must implement various tax changes to address the so-called BEPS problem. Now nations must expand “digital” taxes and agree to a corporate minimum tax rate.

In a comprehensive analysis, Andrew P. Morriss and Lotta Moberg traced the full extend of the OECD’s metamorphosis, succinctly describing its current goal as seeking “to restrain both member and non-member countries from lowering taxes and to encourage lower tax jurisdictions to raise their rates”[ii]. Astute observers were thus not taken by surprise when the BEPS project transformed into a vehicle to pursue a dramatic rewrite of global tax rules.

Digital Taxes And Harmonisation

BEPS Action 1 addressed “Tax Challenges Arising from Digitalisation,” and it has since become the top tax project of the OECD, eclipsing the rest of the BEPS project in its tax significance and potential global economic impact.

The main source of contention is that some nations want to tax companies doing business primarily online based on the location of their users rather than by where the company is located. This would represent a major change—long sought by opponents of tax competition—from the standard of physical presence to some manner of formula apportionment. Practically, it would mean companies like Google and Facebook paying more tax to foreign governments and less to the US.

Replacing a physical presence standard with a destination-based system is the holy grail for tax competition opponents because it would reduce pressure on high tax jurisdictions to stop the flight of mobile capital by offering more competitive rates. The administration of former US President Donald Trump, however, didn’t respond to the issue as a systemic threat to the global tax order, but as a simple raid of US tech companies.

Insofar as stifling European regulatory regimes prevents companies on the continent from reaching comparable status as the US tech giants and to be similarly affected by new digital tax rules, they weren’t wrong. But they also weren’t providing the level of pushback expected from a Republican president.

In part, this was due to the relative disinterest of the White House in these issues, leaving them to be dealt with by lower-level bureaucrats more sympathetic to the views of their European counterparts. Even politically appointees like Treasury Secretary Steven Mnuchin ceded key rhetoric ground by echoing rhetoric about the nonexistent “race to the bottom” on corporate taxes and supporting the idea of minimum global corporate tax rates. However, little serious effort was made to advance that goal, and the Trump administration’s half-hearted effort at a compromise on digital taxes—a “safe harbour” allowing corporations to pick their preferred system—was dead on arrival.

US Embraces OECD Positions

Early indications suggest the Biden administration will be moving US policy closer to that preferred in Europe, and thereby by the OECD, for reasons both ideological and practical.

Ideologically, the Biden administration is simply much more in line with views held by OECD tax officials. They believe that corporations do not pay their “fair share” and that higher tax burdens facilitate economic growth.

At the practical level, they are also as motivated by similar financial concerns as their European counterparts. Although US government spending has long been lower than that in most European welfare states, the recently passed US$2 trillion COVID-19 relief bill, along with Biden’s promises on the campaign trail for what might possibly amount to the most fiscally expansive government in US history, puts US leadership under the kind of pressures that have long motivated tax competition’s opponents. They are desperately in need of “revenue” to spend and they believe corporations have it. That higher corporate income tax rates won’t produce the influx they expect is a fact they are blind to.

Biden’s Treasury Secretary Janet Yellen is putting force behind her predecessor’s rhetorical support of global minimum taxes, saying it would “make sure the global economy thrives based on a more level playing field in the taxation of multinational corporations” and spur “innovation, growth, and prosperity”.

A March 31 “Fact Sheet” released by the White House touted proposed domestic minimum corporate tax rules, urged foreign governments to follow suit, and promised that “The United States is now seeking a global agreement on a strong minimum tax through multilateral negotiations”[iii].

Little daylight remains between the once radical positions of the OECD and the United States, the usual holdout. Obstacles remain surrounding tax rules that primarily impact US tech companies, but the political relevance of their interests dwindles as they become increasingly unpopular among the public.

Low-tax jurisdictions have long since been beaten into submission. The stick of European blacklists and the carrot of an illusory seat at the table via an “Inclusive Framework” have combined to sap their will for resistance. The road is all but clear for the OECD. Absent a new development that shifts the political landscape, the organisation’s quest to eradicate tax competition might finally be realised.

Footnotes:

[i] https://www.cato.org/blog/corporate-taxes-rates-down-revenues

[ii] https://scholarship.law.tamu.edu/facscholar/53/

[iii] https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/31/fact-sheet-the-american-jobs-plan/

Brian Garst
Brian Garst is the Vice President for the Center for Freedom and Prosperity, which works to promote tax competition, financial privacy and fiscal sovereignty.