Global competition to reduce corporate tax rates has reached limit

The competition to cut corporate tax rates in major countries seems to have reached a turning point. Nations need to keep up with the digital age and establish a fair tax system that will also contribute to fiscal reconstruction.

Citing a “30-year race to the bottom on corporate tax rates,” U.S. Treasury Secretary Janet Yellen called in a speech for the introduction of a global minimum corporate tax rate.

The administration of U.S. President Joe Biden has announced a $2 trillion (about ¥220 trillion) plan to invest in infrastructure, expressing the intention to raise the U.S. corporate tax rate from 21% to 28% to secure financial resources.

It is understandable that the Biden administration is trying to shift the tax cut policy of the previous administration of former President Donald Trump, and intends to ask large companies to shoulder a fair share of the burden.

In the past, countries have competed with each other to lower corporate tax rates in order to attract foreign companies and strengthen the competitiveness of their own businesses.

The previous U.S. administration lowered the corporate tax rate from 35% to 21% in 2018. As part of the Abenomics economic policy package promoted by former Prime Minister Shinzo Abe, Japan also lowered its effective corporate tax rate from nearly 40% to just under 30% in fiscal 2016 to attract foreign investment.

However, increasing spending on measures to deal with the novel coronavirus pandemic has rapidly worsened the fiscal condition of Japan and other countries. Britain intends to raise the corporate tax rate on large companies from 19% to 25% in 2023. The competition to lower corporate tax rates can be said to have reached its limit.

In addition, the giant information technology companies known collectively as GAFA have been criticized for evading taxes by collecting their profits in countries and regions with low tax rates, such as tax havens. The proposed minimum tax rate is expected to help prevent such tax dodging.

Ireland, where IT giants are said to be shifting their profits, has a corporate tax rate of 12.5%. It is only natural to change to an equitable international taxation system.

The Group of 20 major economies are aiming to reach an agreement in July on the introduction of a minimum tax rate and other issues. They should accelerate their discussions for that purpose through the cooperation of each member.

The G20 are also discussing rules for the digital taxation of IT giants and other corporations engaging in cross-border internet businesses.

It has been said that the current tax system does not levy corporate taxes unless there are bases, such as factories and offices, in a country, and that multinational companies that make money from online shopping and digital advertising therefore cannot be taxed properly.

The United States, home to many IT giants, was reluctant to reform the tax system under the Trump administration. However, in April, the Biden administration reportedly presented its own plan to allow countries to collect taxes based on sales from about 100 of the world’s largest companies.

If a corporate tax system prevails in which each country places priority on itself, that will hurt the global economy. It is desirable for countries to cooperate and promote constructive discussions.

— The original Japanese article appeared in The Yomiuri Shimbun on April 21, 2021.