At G7 meet, Biden administration moves to give tax sovereignty to OECD

Also: the United Kingdom enjoys a banner week of trade developments

The May 31st to June 6th, 2021 roundup of major trade developments, with L.C.

The Group of Seven deal on setting a 15% minimum corporate tax and shifting how multinational companies are taxed is not yet a done deal. The agreement was reached on June 4^th-5^th by the G7 foreign ministers and central bankers meeting in person in London. The Biden administration hopes the deal will avert a potential trade war over foreign digital services taxes unilaterally levied on major US internet companies. It also hopes the deal will help it sell its unprecedented tax increases to a closely divided Congress.

Well, good luck on that. Aside from the price tag the administration is proposing, it’s not likely that conservatives will let pass unnoticed the administration’s move toward abdication of US taxing authority to an international body, the OECD, whose tax plan the G7 emissaries just endorsed.

This sovereignty giveaway follows the Biden administration’s re-entering the Paris Climate Agreement and its attempt to reinsert the US into the Joint Comprehensive Plan of Action (JCPOA) – the Iran nuclear agreement. Neither agreement was submitted to the US Senate as the Constitution requires.

Eliminating tax competition

The G7 ministers’ joint statement also said that they support talks to adopt “a global minimum tax of at least 15% on a country-by-country basis.” In other words, the US and the other G7 countries propose to abandon the traditional headquarters-based method of international taxation in favor of taxation in every country that can claim revenue was earned. The G7 deal is intended to prevent companies from setting up headquarters in low-tax countries like Ireland .to avoid high taxes on their overall profits.

German finance minister Olaf Scholz approvingly called the deal “bad news for tax havens around the world” since “[c]ompanies will no longer be in a position to dodge their tax obligations by booking their profits in the lowest-tax countries.” US Treasury Secretary Janet Yellen praised the deal for providing “tremendous momentum towards achieving a robust global minimum tax at a rate of at least 15%.” But she told reporters that the attempt to finalize it is “far from over” – there were, after all, representatives of only seven (plus the EU) of the 135 countries involved in the international tax talks. Numerous tax treaties would also have to be renegotiated. Those involving the US would have to receive a two-thirds vote in the Senate.

“A startling surrender”

An editorial in the June 7^th Wall Street Journal describes the G7 deal as “bad news for economies recovering from the pandemic, and especially the US” and that in addition to throttling desirable tax competition between countries, “the OECD plan comes with reams of harmonized fine print on matters such as credits or exemptions for capital investment and research and development.” In addition, “Ms. Yellen also had to agree to a digital tax aimed primarily at U.S. tech companies. The tech tax is a startling surrender for a Treasury Secretary.” Ms. Yellen is “surrendering Washington’s ability to tax American companies as Congress sees fit.”

Meanwhile, at the World Trade Organization, the Biden administration is also continuing to pursue its proposed waiver of US pharmaceutical patents for Covid-19 vaccines (“TRIPS”). The European Union, Japanese, British, South Koreans, and Australians are rightly at odds with the US on this. Who would have thought that US pharmaceutical manufacturers would be looking to foreign allies to protect basic property rights from abandonment by their own government?

UK busy on trade front

Meanwhile, the United Kingdom is working hard to build new trade relations since leaving the European Union. It has just been invited to begin the accession process to the CPTPP, the eleven-member Pacific-centered trade agreement conceived as an alternative to economic domination by China. Japanese Economy Minister Yasutoshi Nishimura hosted a meeting of ministers of the 11 existing members who released a joint statement on June 2nd saying, “The UK’s potential membership would support the mutual interests, common values and commitment to upholding the rules-based trading system shared by the members of the CPTPP. It would also promote market-oriented principles and help to counter protectionism and the use of unjustified trade restrictive measures.” This remark was understood as a dig at both China and the US.

The UK has also reached a new “comprehensive” trade agreement with Norway, Iceland, and Liechtenstein – which constitute the European Economic Area – following what are characterized as months of difficult talks. It includes duty-free trade in industrial goods, duty-cuts on agricultural products (especially for British dairy and Norwegian seafood – though neither side got most of what it demanded), the use of electronic documentation (important to overcome burdensome customs procedures now that the UK isn’t in the EU), and a first-ever for a trade agreement capping of mobile phone charges among the countries. The agreement also allows easy access for skilled professional workers.

The British and Australian trade ministers have been meeting to try to wrap up a deal that their leaders could announce at a planned June 15th meeting. The talks are very far along – but British farmers have expressed strong opposition to opening the UK market for beef and lamb, warning it could ruin them.

There were also reports this week that India and the UK are discussing launching talks for a bilateral free trade agreement this fall, but India’s resistance to joining trade deals (e.g., it opted out of the RCEP) and its frequent obstruction of efforts for lowering trade barriers at the WTO call into question how successful such talks could be.

Unfortunately, the squashing of tax competition just agreed to buy the G7 will work against the prosperity that the UK trade agreements will further.

L.C. reports on trade matters for business as well as Founders Broadsheet.