Explained: What is global minimum corporate tax rate? Why does it matter?

Updated : April 07, 2021 07:16 AM IST

Yellen is seeking international cooperation, crucial for funding President Biden's ambitious $2 trillion+ infrastructure plan.

America's treasury secretary Janet Yellen called on other countries to join Washington in setting a global minimum corporate tax rate. Yellen is seeking international cooperation, crucial for funding President Biden's ambitious $2 trillion+ infrastructure plan.

"President Biden's proposals announced last week call for bold domestic action, including to raise the US minimum tax rate, and renewed international engagement, recognising that it is important to work with other countries to end the pressures of tax competition and corporate tax base erosion," Yellen said.

The plan seeks to increase the US corporate tax rate to 28 percent from 21 percent.

"We are working with G20 nations to agree to a global minimum corporate tax rate that can stop the race to the bottom," she added.

Last week, Biden released a plan to invest $2 trillion+ to revamp infra and boost clean energy products. It aims to revitalize transportation infrastructure, water systems, among other goals.

An increase in the tax rate and other measures to prevent the offshoring of profits will fund it.

Why does it matter?

A global minimum tax rate could help end a "thirty-year race to the bottom on corporate tax rates," Yellen said. Her comments mark a sharp departure from Trump's isolationism strategy. Rather she is acknowledging the perils of isolationism.

In Yellen's words, "We have seen first-hand what happens when America steps back from the global stage."

“‘America first' must never mean 'America alone'," she added.

Biden's plans have taken a sharp U-turn from Trump's landmark tax rate cuts. The ex-US President had slashed corporate tax rates from 35 percent to 21 percent.

If the US raises its tax rates and imposes higher burdens on companies’ foreign profits, similar rates globally will prevent them from taking advantage of lower rates overseas. It would also prevent foreign companies from gaining a potential advantage.

The US plans to use its own tax legislation to stop firms from shifting profits to tax haven countries.

"Together we can use a global minimum tax to make sure global economy thrives on a more level playing field in the taxation of the multinational corporations, and spur innovation, growth, and prosperity," Yellen said.

The bill aims to stabilize tax systems to raise enough revenue to invest in public welfare, she said. It wants to ensure “all citizens fairly share the burden of financing government."

Is it the first time the US tried it?

No, it’s not the first US attempt to push global taxation. It is trying to push for a multilateral agreement on digital taxation at the OECD. The Organization for Economic Cooperation and Development (OECD) is now working on a fresh set of cross-border tax rules. This would also include a global minimum tax rate for MNCs.

But Yellen’s stand is much broader. It seeks to include G20 and other countries as well.

What if it does not go through?

Without a global minimum rate, US rates would be higher than other major economies, making US address unattractive for firms. This would make foreign businesses overseas more profitable than US businesses overseas. In G7 countries, the average rate is 24 percent, even lower in some countries.

Published : April 06, 2021 09:36 PM IST

Explained: What is global minimum corporate tax rate? Why does it matter?

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