The Biden administration’s plan for a global minimum corporate tax risks backfiring on the US and West as the rise of consumers in India and China shifts sales to Asia, tax experts have warned.
The US has proposed a minimum tax based on local sales, but the President has been cautioned that the shrinking influence of the West will mean revenues become concentrated in the developing giants in Asia within decades.
Marvin Rust, head of European tax at Alvarez & Marsal, said: “Over time, as the Indians and the Chinese become more wealthy and middle class and their consumption rises, the effect of the policy would be a shift to tax revenues being collected in China and India.
“You can see that the Chinese and Indians are not going to want this reversed once their populations become more prosperous… from a Western world perspective, there needs to be a bit of care about this.”
The White House is attempting to win support for its plan that will seek to level the playing field in tax and clamp down on avoidance.
Many European leaders have also backed the proposals for a global minimum tax on the biggest firms after seeking to clamp down on US tech giants in recent years.
Matt Kilcoyne, deputy director of the Adam Smith Institute, said: “The concern is absolutely right, and it highlights well that Yellen is attempting to uphold a world that is rapidly ceasing to exist. Rising non-western states are not going to automatically accept the hegemony of the USA.”
He added: “Demanding tax harmonisation risks pushing our old friends and countries we currently have issue with into the arms of one another while diminishing the West.”
Economists expect tectonic shifts in the global economy to occur in the next few decades, with developing countries becoming far more powerful and wealthy. China and India’s economies are expected to catch up with the US in size, with Indonesia, Brazil, Mexico and Nigeria also climbing the rankings.
The US wants to ramp up taxes on businesses to help pay for a jump in spending with Joe Biden eyeing an infrastructure investment boost. However, its plan may struggle to win the backing of countries that benefit from low business taxes.
Bank of America estimates that 60pc of US multinationals’ income was booked in just seven tax havens in 2019, including Ireland, Switzerland and the Netherlands. That has risen sharply from 30pc in 2000.
Countries that stay out of any such agreement could end up benefiting, warned Ethan Harris, a Bank of America economist.
“Suppose all OECD members agree to a minimum corporate tax rate. Then firms will have an incentive to set up manufacturing facilities in a low-tax non-OECD country to sell to other non-OECD countries,” he said.
“How problematic this ends up being for countries that are part of the agreement will depend on how many large economies the US can bring on board.”
Campaign group Tax Justice UK estimated that the proposals would raise £13.5bn for the Treasury, but ministers are yet to give their full backing.
While the US’s plans were publicly welcomed by Britain, officials are said to be wary that UK companies could end up paying more elsewhere.
The UK has the lowest corporate tax rate in the G7 at 19pc, but the Chancellor will increase the headline rate to 25pc from 2023 as he seeks to reduce the damage caused by Covid to the public finances. However, many small businesses will still benefit from the current rate.