Yellen says global minimum tax is necessary to preserve sovereignty

By Doug Connolly, MNE Tax

Harmful international tax competition, unchecked by any minimum tax, has eroded governments’ sovereignty to collect corporate taxes, stripping governments of funds necessary to address urgent fiscal priorities, according to a June 4 letter from US Treasury Secretary Yellen.

Yellen’s letter responds to a May 24 letter from Senator Crapo (R-Idaho) that expressed concerns about the current international tax proposals under consideration as part of the OECD’s Pillar One and Pillar Two negotiations.

The Secretary’s tax sovereignty argument flips on its head an argument made by opponents of the global minimum tax that the imposition of such a tax would infringe on national sovereignty. Such an argument has been made explicitly by Hungarian officials and implied by UK Prime Minister Boris Johnson.

Yellen re-framed the issue of national sovereignty in terms of guaranteeing that countries are able to set a high enough corporate tax rate to fund needed federal programs, rather than in terms of being able to set a low enough corporate tax rate to attract investment away from higher tax jurisdictions.

“For too long, harmful tax competition has starved governments of necessary resources, preventing them from delivering for their citizens,” Yellen said. “Although national sovereignty is invoked to justify this dynamic, we think the race to the bottom on corporate income tax rates actually impedes national sovereignty by preventing governments from funding urgent fiscal priorities.”

In this respect, Yellen contended that the SHIELD proposal put forth in President Biden’s tax plans would create a strong incentive for other countries to adopt a global minimum tax by denying deductions for payments made by US businesses to affiliates in low-tax jurisdictions.  

Regarding the Pillar One proposals on re-allocating a portion of taxing rights to market jurisdictions, Yellen said that the US proposal addresses Crapo’s concerns about Pillar One disproportionately affecting US companies. Under the US proposal, Pillar One would focus on the largest companies, regardless of sector, rather than on digital companies, as originally proposed.

Under such a proposal, Yellen said the US would “be on both the receiving and giving end of the proposed profit reallocations” with the end result that Pillar One would be “largely revenue neutral” for the US.

Consistent with the US proposal, the terms set forth under the June 5 G7 agreement state that Pillar One re-allocation would apply “for the largest and most profitable multinational enterprises.”

Crapo reiterated some of his concerns in a June 5 joint statement issued with US Representative Kevin Brady (R-Texas) regarding the G7 agreement. Crapo and Brady urged caution on moving on an international tax agreement. They expressed concerns about the ability to get consensus on a minimum tax from the US’s biggest foreign competitors and about the possibility of digital levies persisting post-agreement.