THE ARCHITECTURE OF THE COUNTRY-BY-COUNTRY MINIMUM TAX REGIME PROPOSED BY THE UNITED STATES.
A CALL FOR GLOBAL TAXATION 836 II. UPGRADING THE U.S. STRATEGIES AGAINST PROFIT SHIFTING 844 III. RATIONAL CHOICE THEORY AS A TOOL FOR U.S. STRATEGIES 855 IV. THE NEW CBC MINIMUM TAX REGIME ADVANCED BY THE UNITED STATES 861 V. MINILATERALISM AND THE GLOBAL TAXATION MINIMUM STANDARD 871 VI. THE INCLUSIVE FRAMEWORK AND GLOBAL TAXATION 878 VII. THE CBC MINIMUM TAX AS A PARADIGM SHIFT 887 I. A CALL FOR GLOBAL TAXATION
On June 7, 2021, the G7 reached an agreement, which was confirmed later by the OECD/G20 Inclusive Framework (the Inclusive Framework) on July 1, 2021, (1) and subsequently endorsed by the G20. This agreement is based on the reallocation of taxing rights ("Pillar One") and minimum effective taxation on global profits of multinationals ("Pillar Two"). The OECD again issued a document on October 8, 2021 reiterating with some modifications the initial agreement and presenting a detailed implementation plan. (2) The G7 agreement followed a proposal for a minimum global tax advanced at the beginning of 2021 by the Biden administration in the context of the American Jobs Plan (the "U.S. Plan"), a broad economic platform for investment in infrastructures, production of clean energy, the care economy and other priorities. (3)
On December 21, 2021 the OECD further issued detailed guidelines for Pillar Two. (4) At the same time, the EU Commission affirmed that it would act swiftly to implement the forthcoming global agreement, and in fact on December 22, 2021, it proposed a directive ensuring a minimum effective tax rate for the global activities of large multinational groups. (5) Finally in 2022 the OECD advanced a comprehensive proposal together with a programme of work. (6)
A process of international negotiations, unprecedented in tax matters, has been set in motion by the United States, potentially leading to a different architecture of international taxation. In this Article I will focus on the structural dynamics that underlie the negotiations that are under way at the international level by bringing rational choice theory about so-called international regimes into the international tax debate at this very juncture. Therefore, I will not discuss the details of the U.S. Plan also in light of the cumbersome and complex legislative process required to pass not only the tax bill but also the Biden economic reform as a whole.
My goal is to demonstrate that in the era of full mobility of capital, states should initially rely on unilateral optimal strategies to address at the multilateral level the regulatory tax arbitrage in which multinational enterprises ("multinationals") confront the limited reach of territorial states, taking advantage of the race-to-the-bottom of tax rates triggered by tax competition. This is precisely the starting point of the negotiations activated by the United States which began in 2021. In this context, an optimal strategy is essentially meant to be a "dominant strategy" (also an "optimal strategy"), i.e., that strategy that an actor has when he has one course of action that outperforms all others no matter what the other actors do. If an actor such as, for example, the United States has such a strategy, the actor will choose the dominant strategy without worrying about the moves of the other actors.
To fully grasp the import of states' optimal strategies, one should also comprehend the structural features of multinationals. Differently from territorial states, multinationals operate through affiliated units abroad forming a group, but are a single economic unit in which an ultimate parent company exercises central management and control and which is linked to the country where it is a resident (the ultimate-residence country or more generally the home state). In that sense, for brevity's sake, I will refer to the home states and the treatment by these states of their own multinationals, meaning that it is possible to assume that there are home states that are ultimately responsible for taxing the global income of multinationals which have their central management and control in those states.
If multinationals are factored in, there is an additional dimension of tax competition that goes beyond a conflict game among states leading to a race-to the-bottom of tax rates: private actors, such as multinationals, intermediate between the state where they are resident and the state or states where they market their products or services (the host state or the market state), to reduce or eliminate taxation. (7)
This Article proceeds as follows. Part I outlines the overarching features of the call for global taxation now being negotiated at the international level, while Part II describes in more detail how home countries following the example of the United States can upgrade their strategies against profit-shifting and tax competition through a country-by-country minimum tax encompassed under a comprehensive agreement pursued at the OECD/G20 level. The Article then discusses in Part III how the United States can upgrade its strategies against profit-shifting by adopring a global taxation approach.
Part IV shows that we are possibly heading toward an international tax regime, a concept drawn from international relations and brought to bear in international taxation by current negotiations about the country-by-country minimum tax. To address this question, I first spell out the grammar of tax concepts about multilateralism and cooperation, then briefly describe how rational choice theory can be applied to collective action problems at this juncture. Part V then describes the functioning of the country-by-country minimum tax regime proposed by the United States, while Part VI discusses its impact at the OECD level.
Part VII concludes by canvassing a potential paradigm shift in international taxation as we move toward a global minimum tax, a shift that may imply the transitioning to a new constellation of concepts, values and practices, from taxing states in continuous conflict to taxing states that need to cooperate to address profit-shifting and tax competition through unprecedented multilateral solutions.
Profit-shifting and tax competition are interntwined: countries reduce tax rates and thus multinationals shift profits to lower rate countries, and the more profits are shifted, the more rates are lowered, triggering a so called race-to-the-bottom. The main argument presented here is that the first step towards a sustainable and effective multilateral framework about profit-shifting and tax competition is that home states should deploy unilateral dominant strategies akin to those now proposed by the United States and endorsed by the G7 and G20 to assert their own tax clout on their multinationals, a prerogative that has been substantially lost as a result of the increased mobility of capital. This strategy is in fact a prerequisite for the development of cooperation and the establishment of an effective multilateral framework about profit-shifting and tax competition.
So, the argument that I propound is that the unilateral exercise of full tax sovereignty by home states on the global profits of their multinationals not only prevents arbitrage by multinationals, who will have to pay taxes at least to one state, but also is the prerequisite of multilateral cooperation among states. Unilateral moves by home states, in this context, do not conflict with multilateral arrangements; to the contrary, they facilitate them.
More precisely these unilateral dominant strategies consist of a default rule under which jurisdictions impose a tax at a pre-set minimum rate on resident multinationals on global consolidated net profits, preventing in any case double exemption or reduced taxation. Additionally fall-back rules for apportionment of taxing rights based on profit allocation and nexus rules can and should be employed to protect nationalinterests of countries--in particular developing countries--where multinationals carry out market and other substantial activities often without physical presence.
It is necessary to define the two seminal concepts of country-by-country (CBC) minimum tax and CBC minimum tax regime. Unilateral dominant strategies of taxing multinationals in their home countries are now identified by the concise concept of the CBC minimum tax (sometimes more vaguely "global minimum tax") proposed by the United States (8) and negotiated at the international level: in the CBC minimum tax, each individual country participates in the cooperative framework in its capacity as home state of its own multinationals and unilaterally subjects those multinationals to taxation on global profits through the exercise of extraterritorial tax jurisdiction. (9) Taxes imposed on the profits of these multinationals by states other than the home states will be relieved from double taxation by the home states. (10)
Home states cooperating in a multinational framework to tax the global profits of their multinationals unilaterally will establish a particular international tax regime (further clarifications on the concepts of international regimes are found in Part III) denominated CBC minimum tax regime. So the CBC minimum tax regime results from the coming together of unilateral home state strategies of taxing globally their own multinationals and would not be the result of an agreement introducing profit allocation criteria. The CBC minimum tax is not a tax imposed at the international level, and the CBC minimum tax regime initially is not a systemic legal agreement that binds signatories, but it can eventually morph into such an agreement.
It is essential to highlight that the move toward global taxation of multinationals by home states is not aimed at further protecting the interests of capital exporting countries because such a move does not limit the tax prerogatives (11) of other countries, such as "BRICS" (the acronym used to denote Brazil, Russia, Indonesia, China, and South Africa)...
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