The Biden administration is attempting to do something that would have been politically and economically difficult to imagine only a few years ago: use American tax policy as the foundation for a broader international agreement establishing a minimum level of corporate taxation.

On April 5, 2021, U.S. Treasury Secretary Janet Yellen called for renewed international cooperation to address what she described as the global “race to the bottom” in corporate taxation. The administration was simultaneously proposing to increase the U.S. federal corporate tax rate from 21% to 28% as part of President Biden’s American Jobs Plan, while seeking to strengthen the minimum tax imposed on the foreign earnings of U.S. multinational corporations.

The objective was straightforward in principle but considerably more complicated in practice: if the United States raised its corporate tax burden while other jurisdictions maintained substantially lower rates, American companies could have greater incentives to relocate investment, operations or profits. The administration therefore sought to make the American tax increase part of a broader international framework.

The implications extend well beyond corporate taxation. If successful, such a framework could materially change the competitive relationship between jurisdictions and reduce one of the principal tools that smaller and emerging economies have historically used to attract foreign investment.

The American Tax Problem

The immediate issue confronting the Biden administration was the proposed increase in the U.S. corporate tax rate from 21% to 28%.

President Biden presented the increase as part of a much broader infrastructure and investment programme. The administration argued that additional corporate tax revenues would help finance investment in infrastructure, clean energy, research and development and other areas intended to strengthen American competitiveness. The administration’s March 31 American Jobs Plan specifically proposed a 28% corporate tax rate and a 21% minimum tax on the foreign earnings of U.S. multinational corporations.

The difficulty was that corporate capital is mobile.

A corporation does not necessarily have to move its headquarters to another country to alter where profits are generated, where intellectual property is held, where financing is arranged or where particular economic activities are conducted. International businesses have developed increasingly sophisticated structures for allocating capital and taxable income across jurisdictions.

This is one reason why the international tax debate has become inseparable from questions of economic competitiveness.

The issue of international financial transparency was already developing rapidly, as discussed in FATCA and Foreign Bank Accounts, while the broader direction of U.S. tax policy was becoming increasingly important to internationally mobile capital.

The administration’s answer was therefore not simply to increase American taxation, but to seek international coordination.

From Domestic Tax Policy to International Coordination

Yellen’s April 5 remarks were significant because they explicitly connected U.S. domestic tax reform with international negotiations.

She stated that the United States was working with G20 countries to establish a global minimum corporate tax designed to reduce the incentives created by international tax competition.

This was not an entirely new concept.

The OECD and G20 had already spent years attempting to address base erosion and profit shifting by multinational enterprises. The OECD’s work on Pillar Two, published in October 2020, specifically examined the design of a global minimum tax as part of the international response to the challenges created by digitalisation and multinational tax planning.

The Biden administration was therefore attempting to accelerate an existing international process while aligning it with its own domestic revenue requirements.

That distinction matters.

The United States was not simply proposing that other countries adopt an American tax rate. It was attempting to establish a minimum international floor below which corporate taxation would not fall, thereby reducing the competitive disadvantage that could arise if the United States moved substantially faster than other jurisdictions.

The 21% and 28% Distinction

There were two separate numbers at the centre of the American proposal.

The first was the proposed 28% U.S. federal corporate tax rate.

The second was a proposed 21% minimum tax on the foreign earnings of U.S. multinational corporations, calculated on a country-by-country basis. The administration argued that this would reduce the incentive for American companies to shift profits into low-tax jurisdictions.

These proposals should not be confused with a 21% global minimum corporate tax.

On April 5, Yellen was advocating international agreement on a global minimum tax, but the eventual international rate had not yet been determined. Her remarks made clear that the United States wanted to work with the G20 to stop what she regarded as destructive tax competition, while the American domestic proposal contemplated a higher minimum tax on the foreign earnings of U.S. multinationals.

That distinction is important when assessing the significance of the proposal from the perspective of international investors.

The Tax Competition Question

The underlying economic argument is that tax competition can influence the location of investment.

The OECD’s 2020 analysis showed the extent to which corporate income tax rates had declined internationally. The average combined statutory corporate income tax rate across OECD countries had fallen from 32.2% in 2000 to approximately 23.5% in 2020. At the same time, the number of jurisdictions with corporate tax rates below 20% had increased substantially.

The United States was therefore entering an international environment in which lower corporate tax rates had become an established feature of jurisdictional competition.

There are competing interpretations of this development.

One view is that excessive tax competition erodes national tax bases and encourages corporations to structure their affairs primarily around taxation rather than productive economic activity.

Another is that tax competition provides smaller jurisdictions with an important means of attracting capital, employment and investment that might otherwise concentrate in larger economies.

For many smaller countries, particularly those without the enormous domestic markets, capital markets or infrastructure of the United States, a competitive tax regime can be an important component of economic strategy.

That makes the idea of establishing a global tax floor considerably more consequential than simply an administrative change to corporate taxation.

Why Smaller Jurisdictions May Resist

A global minimum tax is particularly challenging for jurisdictions that have historically relied upon tax competitiveness as part of their economic model.

A large economy such as the United States can potentially compensate for a higher tax burden through the scale of its domestic market, sophisticated infrastructure, access to capital, research institutions and highly developed professional services.

A smaller economy may not have the same advantages.

For such jurisdictions, a lower corporate tax rate can form part of a broader proposition designed to attract international businesses and investment.

The question therefore becomes whether governments should be permitted to compete through taxation or whether international coordination should establish limits on that competition.

Yellen’s position was clear. She argued that countries should compete on factors such as infrastructure, education, research and workforce quality rather than primarily through lower corporate tax rates.

But that philosophy necessarily creates winners and losers among jurisdictions.

The Developing-Country Dimension

The issue becomes even more complicated when developing economies are included.

The OECD’s international tax work had already recognised that developing economies can be particularly vulnerable to base erosion and profit shifting because of their reliance on corporate income taxation and their need to attract multinational investment.

At the same time, those same countries may have stronger reasons than developed economies to maintain competitive tax regimes.

A global minimum tax could therefore have two very different effects.

It could protect governments from an international bidding war in which jurisdictions continually reduce corporate tax rates to attract investment. But it could also remove one of the policy tools available to countries seeking to compete for that investment.

This tension was present from the beginning of the debate.

The question was not simply whether a global minimum tax was desirable. It was whether a sufficiently broad group of countries would consider the loss of tax-policy autonomy to be an acceptable price for greater international coordination.

The Broader International Tax Architecture

The proposal also needs to be understood within the wider OECD/G20 effort to reform international taxation.

By 2021, the international tax system was already under pressure from the increasing ability of multinational businesses to operate across borders without corresponding physical presence. Digitalisation had made traditional concepts of corporate taxation increasingly difficult to apply.

The OECD’s January 2020 statement on its two-pillar approach demonstrated that international negotiations were already moving toward a coordinated framework addressing both the allocation of taxing rights and minimum taxation.

Pillar Two was particularly relevant because it contemplated a global minimum tax mechanism.

The significance of Yellen’s intervention was therefore not that the concept had suddenly appeared. It was that the United States was now placing substantial political weight behind the effort.

The world’s largest economy was effectively saying that American tax reform should be accompanied by international reform.

A New Form of Jurisdictional Competition

There is an important irony in the proposal.

The United States was seeking international cooperation precisely because unilateral tax policy could undermine its own objectives.

If the United States increased its corporate tax rate while other jurisdictions remained materially more competitive, capital could respond.

International coordination was therefore being used as a mechanism to limit the consequences of national tax policy.

This represents a significant development in the evolution of international taxation.

Governments have historically competed with one another for capital. The emerging proposal sought instead to coordinate the parameters within which that competition could occur.

The consequence could be a gradual shift away from tax-rate competition and toward competition based on infrastructure, political stability, labour markets, regulatory systems, access to capital and quality of life.

For investors, however, that would not necessarily eliminate jurisdictional competition. It would change its nature.

What This Means for International Capital

For internationally mobile investors, the development was another indication that tax policy could no longer be viewed solely through the lens of a single country.

The same trend was already visible in the expanding debate over individual taxation, wealth taxation and financial transparency. As discussed in Democrats Push for a ‘Wealth Tax’, the United States was simultaneously experiencing a much broader political debate over the taxation of accumulated wealth.

The earlier US Ends UBO Privacy and Crypto & Taxes developments also reflected the broader movement toward greater transparency and closer scrutiny of internationally mobile assets.

Taken together, these developments suggested that the international environment was becoming less tolerant of tax arbitrage based simply on moving assets, profits or legal structures between jurisdictions.

That did not mean that jurisdictional diversification was becoming irrelevant.

Quite the opposite.

It meant that investors needed to distinguish between jurisdictions based not merely on headline tax rates, but on the durability of their legal systems, residence rules, investment regimes, regulatory environment, political stability and long-term treatment of capital.

The Strategic Question

The success of a global minimum tax initiative was far from certain on April 6, 2021.

The United States could propose a framework, but implementation would require cooperation among a large number of sovereign governments with very different economic interests.

For high-tax developed economies, the proposal could offer protection against the erosion of their corporate tax bases.

For lower-tax jurisdictions, it could remove an important competitive advantage.

For developing economies, the consequences could be even more complicated, particularly where tax incentives are used to compensate for smaller domestic markets or less developed infrastructure.

The diplomatic challenge was therefore substantial.

Yellen’s April 5 intervention nevertheless demonstrated that international taxation was moving into a new phase. The United States was no longer treating corporate tax competition solely as a domestic policy issue. It was attempting to make it an international policy issue.

The Beginning of a Global Tax Baseline

The significance of the April 2021 proposal lies less in whether a particular rate would ultimately be adopted than in the direction of travel.

The United States was proposing to increase its own corporate tax rate while simultaneously seeking international agreement to establish a floor beneath corporate taxation globally. The objective was to prevent American tax reform from simply creating a new incentive for businesses to move profits or investment elsewhere.

That approach represented a fundamental challenge to the traditional model of international tax competition.

The emerging question was no longer simply which country has the lowest tax rate?

It was becoming which jurisdictions can offer the most attractive overall economic environment once the ability to compete primarily through taxation is constrained?

For governments, that could mean greater emphasis on infrastructure, human capital, technology, institutional quality and economic stability. For investors and internationally mobile businesses, it meant that tax planning would increasingly have to be considered alongside broader questions of jurisdictional risk and long-term optionality.

The negotiations were only beginning.

But the direction was already clear: the United States was attempting to move the international tax system toward a common baseline, and if that effort succeeded, the consequences would extend well beyond corporate taxation. They would reshape the competitive relationship between jurisdictions and, potentially, the way international capital chooses where to live, invest and operate.