Market Overview

9 April 2021

Will it be a Global Tax Revolution?

The Treasury Secretary of the United States Janet Yellen called governments around the world to set up a minimum corporate tax rate at 21%. The idea was swiftly supported by the International Monetary Fund (IMF). The U.S. believes that this unified tax rate will act as a general wheel for the global economy.

So, according to Yellen this minimum tax rate should prevent cross-border capital flight, domiciliation by corporates to low-tax jurisdictions. IMF considers such a practice as a tax evasion and partial budget divestiture of incomes needed to finance economic and social expenditures. It could be thought that if tax rates were sufficiently high everywhere in the world there would be “no place to run”, and every government would have greater revenues.

This act may have been done deliberately just after recently elected U.S. President Joe Biden proposed another $2.3 billion stimulus plan that is designed to be financed primarily by rising corporate tax from 21% to 28%. U.S Administration is seen to be gravely concerned that corporates may move to other jurisdictions to minimise their tax burden. Corporate tax rate was lowered by Donald Trump in 2017 from 35% to 21% to bring corporates back to the United States and promote their development.

Corporate tax averages at 24% in G7 countries, while in the EU it stands at 21.5%, according to Tax Foundation. So, a call by Mrs. Yellen for a minimum at 21% could be tailored to the European tax regime.

The unified global corporate tax would probably mostly benefit developed countries as these countries have developed tax systems and relatively high tax burdens. Some 144 countries in the world have corporate tax equal or above 21%. The Comoro islands have the highest corporate tax  which stands at 50% and Puerto Rico – at 37.5%. Some 80 countries have corporate tax lower that 21%, and those are mostly developing countries. The United Kingdom’s corporate tax rate stands at 19%, which is an exclusion from developed countries.

With such an equilibrium it may seem that Yellen’s call might be supported by most countries worldwide. However, there will probably be many countries that may not support a new tax minimum, as they are not only seen to be tempting foreign companies but they are also developing their own firms. It may not be thought that   such countries as the United Arab Emirates or Bahrain, which have zero corporate tax rates,  are trying to allure corporates in the same way that  the Bahamas, the Caiman Islands or the Isle of Man do.

Nevertheless, it could be that jurisdictions with lower than 21% corporate tax rate would remain stable. So, even if this minimum corporate tax rate is set up in dozens of countries, it may not be enough, and it may hardly accommodate the desired results.

 

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Mark Goichmann
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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