The Biden administration has proposed a new move to tackle the low tax rates paid by multinational businesses. These businesses tend to shift profits out of the local market and into low-tax jurisdictions. According to economists, the shifting of these profits has amounted to $427 billion annually. Biden’s multinational tax agreement could see a dramatic shift in this and introduce reforms that ensure multinational companies pay an appropriate amount of business tax. Read on as we discuss the details of this agreement and what it could mean for technological giants like Facebook, Google, Apple, and big pharmaceutical companies.
What Does the Multinational Business Tax Agreement Propose?
The proposed plan focuses on new tax reforms that would apply to approximately 100 companies currently maintaining very high-profit margins. These mainly include large tech companies and conglomerates. So far, the Biden administration has sent the proposed tax rules to 135 countries.
If enforced, national governments would require these companies to pay taxes on the revenue they earn in each country. So, even if a company is based in the USA but has operations in a foreign country, it would have to pay taxes at a fixed rate.
So far, the new business tax plan has not specified any profit margin or revenue thresholds. Governments are likely to establish these thresholds in the international negotiations in the coming months.
At present, the Biden administration is also working to establish a minimum global tax rate. If successful, we could see some of the largest economies in the world agree to impose a minimum tax rate on company profits.
Currently, the business tax rate is 21% in the US, 19% in the UK, 12.5% in Ireland, and 25% in China. Countries may be allowed to impose higher tax rates for businesses. However, they would not be allowed to go lower than the agreed threshold. The move could discourage multinational companies from moving their operations to low-tax jurisdictions to avail of tax discounts. It could eliminate the concept of tax havens.
Who Will Be Affected?
The new tax plan is a softer version of what Biden originally proposed during his election campaigns. It could help several other corporations avoid getting hit by taxes while still holding large companies accountable. For instance, according to Action Aid, companies like Google, Microsoft, and Facebook avoided paying as much as $2.8 billion in tax revenue to third-world and developing nations last year.
A new report also revealed that Google, Facebook, Apple, Microsoft, Amazon, and Netflix have used legal tax strategies to avoid paying a significant chunk of the taxes they owed from 2010 and 2019.
The collective taxes paid by these companies across the global territories they operate in were approximately $155.3 billion less than what was required under the actual tax rates.
The Biden administration is attempting to ensure these companies pay the right amount of taxes they owe in the future. The current approach mainly focuses on the size of the companies and their profitability. It does not focus on the characteristics of their businesses.
What Else Is Being Done About Multinational Taxes?
Besides introducing an international tax plan for multinational companies, we have also seen initiatives to introduce taxation on the digital presence of multinational companies. Most recently, Maryland introduced a digital advertising tax. This tax applies to companies that operate in multiple states and advertise to Maryland customers. It would require them to pay taxes on revenue collected from Maryland customers that result from digital advertising. The proposed tax rate is between 2.5% and 10%. It would apply to taxpayers that earn at least $1 million in gross revenue from digital advertising.
Countries such as the UK have also introduced taxes on digital services. It increases the cost of digital advertising in the country. The taxes are meant for business groups that generate global digital services revenue of more than £500 million ($696 million), and £25 million ($34.83 million) from the UK. These companies would have to pay 2% taxes on their digital services revenue. Due to the high revenue threshold, the tax plan mainly targets companies like Facebook, Google, and Amazon.
France also enforced a 3% digital services tax for revenue that digital companies generate in France. The tax rate is meant for companies earning €750 million in global advertising revenue and sourcing €25 million of this revenue from France.
Digital services revenue primarily refers to revenue generated from the following sources:
- Data collected from internet users
- Search engines
- Social media services
- Online marketplaces
Wrapping It Up
The new multinational business tax agreement proposed by the Biden administration could have a monumental impact on tech companies and conglomerates with global operations. It could make tax minimization strategies redundant and allow governments to generate a significant amount of tax revenue.
If you want to know how this international tax plan could affect your business, get in touch with the team at Windes. We are an accounting firm operating in southern California and specialize in tax preparation, tax audit, and tax advisory services. Contact us today to learn more.
For questions or more information about this article, please contact our tax professionals at firstname.lastname@example.org or toll free at 844.4WINDES (844.494.6337).