Yellen’s remarks
Yellen said that the Biden administration has proposed to tax the investment income of families making more than $1 million at the same rate they pay on wages and to tax some previously untaxed capital gains on the final return of wealthy taxpayers. These reforms would remove biases in the US tax code that “favor wealth over work.” The administration is not proposing to ask families making under $400,000 per year to pay more in taxes.
On the US corporate side, the Biden administration proposes raising the corporate tax rate to 28% – which is the midpoint of the pre-2017 level and the rate imposed after Trump’s Tax Cuts and Jobs Act.
The administration proposes reducing the estate-tax exemption amount from the current level of approximately $11.5 million to $3.5 million ($7 million for a couple), with an increase in the top estate-tax rate from 40% to 45%.
On the international side, Yellen commits to “vigorously engage” in the OECD/G20 negotiations to reform the international tax system. A global minimum tax agreed to at the OECD would stop the destructive global race to the bottom on corporate taxation.
Currently, the OECD is in the midst of multilateral negotiations on tax challenges arising from digitalization. Negotiations thus far have centered upon two OECD “pillars.”
The Trump administration was extensively involved in the negotiations with the OECD, then put the negotiations on pause in 2020.
Instead of waiting for US-OECD agreement, a number of countries have chosen to unilaterally implement their own digital services taxes (DSTs). As of January 15, more than a dozen countries have already imposed DSTs, with many more countries having either published proposals to enact a DST (including Austria, Spain, UK, France, India, Italy and Turkey). The DST policy frequently discriminates against non-resident businesses and imposes double taxation. Yellen believes that businesses should be able to recover their costs so that the income tax taxes net income and not gross receipts.
If such disputes were not resolvable through international negotiations, Yellen would work with the United States Trade Representative, i.e., use the Trump administration’s policy of imposing trade tariffs – carrot and stick.
What are the OECD pillars Yellen referred to?
In October 2020, the OECD published blueprints for international tax reform that aim to raise extra taxes of $100 billion annually.
Pillar 1 proposes to allocate profits according to formulas to the “market” country where consumers are. Two amounts would be allocated by multinational groups to such countries, Amounts A and B.
Amount A might perhaps be 20% of residual (= excess offshore) profits exceeding 10% of sales turnover, for groups with global revenues above 750 million euros, perhaps. But Amount A would only relate to profits from: (1) automated digital services, and (2) consumer-facing businesses.
Amount B might perhaps be a fixed profit margin on “baseline marketing and distribution costs” that would vary depending on industry and region.
Pillar 2 proposes to impose a home country top-up tax on multinational parent corporations with global turnover above 750 million euros – perhaps a 12.5% minimum tax on income from each market country after excluding 10% of payroll and depreciation expenses. This is referred to as an Income Inclusion Rule (IIR). To stop shenanigans with expenses, there would be a back-up tax on undertaxed payments.
None of the above is final yet.
Made in America?
President Biden’s “Made in America” proposal includes a 10% penalty on goods and services imported by US companies from foreign affiliates. Yellen explained that the president’s objective is to create incentives for American companies to create and maintain jobs at home.
Biden’s Offshoring Tax Penalty is aimed at those who offshore manufacturing and service jobs to foreign nations to sell goods or provide services back to the American market when those jobs could have been done by US workers. Many countries await details, e.g., China, Israel.
Cryptocurrencies
Yellen thinks it important to consider the benefits of cryptocurrencies and other digital assets, and the potential they have to improve the efficiency of the financial system, while curtailing their use for malign and illegal activities.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
leon@h2cat.com
The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.