The “Double Irish, Dutch sandwich” sounds like a menu item, but it’s actually a complicated business scheme where companies open offices in Ireland and the Netherlands, two countries with low corporate tax rates, and move money between them to minimize their tax burdens. Tax havens (and tricks to manipulate them) are now a common part of multinational business practice. By taking advantage of legal loopholes and opening up subsidiaries in places such as Bermuda or the Cayman Islands, corporations avoid paying billions of dollars of taxes, while ordinary citizens and domestic businesses keep paying their fair share. In 2016, 73% of Fortune 500 companies reportedly operated subsidiaries in tax-haven countries.
In an effort to eliminate this practice, Treasury Secretary Janet Yellen announced on April 5, 2021, that the Biden administration would be seeking a global minimum corporate tax rate: a figure that would mean all corporations with international entities would pay at least a reasonable amount (countries could set their corporate tax rate higher than the minimum). Yellen argued this would prevent a “race to the bottom,” whereby every country aims to outdo each other with a lower rate to attract businesses. An across-the-board floor for corporate taxes would create more equitable economic growth around the world.
“Together, we can use a global minimum tax to make sure the global economy thrives based on a more level playing field in the taxation of multinational corporations,” she said at an appearance at the Chicago Council on Global Affairs, “and spurs innovation, growth, and prosperity.”
Yellen’s pitch is part of President Biden’s “Made in America Tax Plan,” unveiled last week, which proposes to raise the domestic corporate tax rate in the U.S. from 21% to 28%—and would require corporations making offshore profits in countries where the rate is low or even nonexistent, to pay the U.S. a minimum of 21%, up from the current rate of 10.5%. “The time has come to level the playing field,” the plan reads, “and no longer allow countries to gain a competitive edge by slashing corporate tax rates.”
“Our tax rules basically reward companies when they can make their profits become offshore profits,” says Steve Wamhoff, director of federal tax policy at the Institute on Taxation and Economic Policy (ITEP), a nonprofit, nonpartisan think tank. He says a global rate would clamp down on companies using a creative array of “accounting gimmicks” to avoid taxes. The most common “gimmick” is the subsidiary setup, where a company has an office in the Cayman Islands that, on paper, produces all the revenue, even if there are few or no employees who work there. But some companies have gone as far as using something called tax inversions, whereby they restructure the business so that the parent exists internationally, and the U.S.-based entity becomes a mere subsidiary.
“Offshore profits” is too generous a term, said a report by ITEP and the U.S. Public Interest Research Group, which preferred the term “profits booked offshore for tax purposes.” In that report, for the year 2016, the most recent available report of its kind, showed that 57% of companies that had subsidiaries located them in Bermuda or the Cayman Islands, where the tax rates are 0%. It noted that Bermuda, plus four other popular tax havens—Holland, Ireland, Switzerland, and Luxembourg—represented 43% of American multinationals’ foreign earnings, but only 7% of their foreign investments. “Often, a company’s operational presence in a tax haven may be nothing more than a mailbox,” the report reads. As once noted by President Obama, one small high-rise in the Cayman Islands, Ugland House, was reportedly home to 19,000 companies.
The most guilty companies are pharmaceutical corporations such as Pfizer and Johnson & Johnson, as well as tech companies such as Microsoft and Apple, which had the most offshore money, at $246 billion (avoiding $76.6 billion in taxes, the report estimated). This practice is easier for tech companies with nontangible products, says Reuven Avi-Yonah, a law professor and director of the international tax program at the University of Michigan, because they can smoothly move intellectual property overseas. Still, Nike, General Electric, and PepsiCo had subsidiaries; Goldman Sachs had the most, with 905 subsidiaries in 18 countries.
In order for Yellen’s plan to work effectively, it would need the cooperation of other countries to agree on a rate. “The idea behind this is to put pressure on other rich countries, which also have their own companies, to do the same thing,” Avi-Yonah says. If all countries had the same tax rate—and a relatively high one—companies wouldn’t benefit from creating offshore subsidiaries, because the host country would impose the same rate. If the U.S. were to have to do it alone, companies would face taxes that other countries’ businesses didn’t.
The Republican tax overhaul, signed into law in 2017, created a “territorial” tax system, establishing an overseas rate at 10.5%. Republicans claimed it would be high enough to convince companies to abandon their schemes and bring their money back into the U.S. (called repatriation). While about $1 trillion was reported to have come back to U.S. shores by the end of 2019, the figure wasn’t close to the $4 trillion that President Trump had touted. “[Corporations] had less reason to engage in some of those shenanigans,” Wamhoff said, but the perks were still enough to keep some subsidiaries abroad. In some cases, the lower rate even encouraged companies to take jobs and operations abroad.
The U.S. has already been in talks with the OECD, an intergovernmental economic coalition, to establish the rate, but the alliance would then have to convince the rest of the world’s countries to adopt it as well. Yellen said she’d also be talking to the G20 group, the group of wealthy nations whose multinationals are most represented abroad. “The losers would be the economies that were used to attracting profits,” Avi-Yonah says. The Cayman Islands, for instance, takes an annual licensing fee from the subsidiaries as its model of revenue. “To the extent that [smaller] countries are benefiting from what is clearly tax avoidance,” Wamhoff says, “yeah, those countries will no longer get those benefits.”
Raising tax revenues is a way to create more federal funds, especially at a time when the U.S. is rebooting a flagging economy created by COVID-19. (The U.K. is also raising rates, for the same reason.) The tax dollars could be essential in paying for Biden’s newly announced $2.25 trillion infrastructure plan, which aims to fix roads and bridges, eliminate lead pipes, and invest in jobs, innovation, and clean energy. According to the Urban-Brookings Tax Policy Center, a global minimum corporate tax could raise $442.1 billion over 10 years—and that’s before the domestic revenue.
In addition to raising revenue for public goods, Yellen said the global minimum would ensure “that all citizens fairly share the burden of financing government.” In that way, it’s also symbolic, making sure that multinationals play by the same terms as domestic companies that are paying their fair share. Wamhoff thinks reform is realistic and that the 21% proposed by the U.S. would be a strong figure. “No one doubts that all these companies are engaging in all this nonsense,” he says. “We can shut that down if we have a strong minimum tax like this.”