Big multinational companies will be subject to a global minimum tax for the first time as landmark cross-border tax reforms go live. These reforms are expected to raise up to $220 billion in extra annual revenue. After 140 countries struck a deal to close loopholes in the international system almost three years ago, major economies will now apply a minimum tax rate of at least 15 percent on corporate profits. This means that if a multinational company’s profit is taxed below this rate in one country, other countries will be able to charge a top-up levy. The Organisation for Economic Co-operation and Development (OECD) estimates that this will increase annual tax revenue by as much as 9 percent worldwide.
The reform has been praised for its super smart design by Jason Ward, principal analyst at the Centre for International Corporate Tax Accountability and Research pressure group. Ward believes that it will reduce the use of tax havens by companies and incentives for countries to be tax havens. The introduction of this global minimum tax also puts a halt on the race to the bottom that was previously seen in corporate tax rates.
Starting from January, the EU, UK, Norway, Australia, South Korea, Japan, and Canada will be among the first wave of jurisdictions implementing the global minimum tax. These rules will apply to multinational companies with an annual turnover of more than €750 million. Even countries long seen as tax havens, such as Ireland, Luxembourg, the Netherlands, Switzerland, and Barbados, will participate in the implementation. Previously, Barbados had a corporate tax rate of just 5.5 percent.
Although the United States and China have not yet introduced legislation to implement the global minimum tax, the reforms are designed to have a significant impact even without their participation. An OECD deal in 2021 consists of two main pillars – the first aims to make multinational companies pay more tax where they do business, while the second establishes a global minimum corporate tax rate.
Pascal Saint-Amans, the OECD’s former tax chief, explains that the success of the second pillar depends on a critical mass of countries implementing it. In other words, if some nations introduce the global rate, other nations will have an incentive to follow suit or risk losing tax revenue. However, the implementation and response of multinational companies will play a crucial role in determining the effectiveness of these reforms.
The introduction of the global minimum tax is expected to shift where additional revenue ends up in the early stages, according to Manal Corwin, head of tax at the OECD. She believes that this will change over time, with more taxes ultimately being paid where economic activities take place. Nevertheless, the reforms are also expected to lead to increased tax competition between jurisdictions through the use of credits, grants, or subsidies.
While the global minimum tax does provide certain exemptions, such as a carve-out for substance to encourage investment in tangible assets, it has attracted criticism. Critics argue that this may allow companies to pay tax below the 15 percent rate if they have sufficient real activity in low-tax countries.
It remains to be seen how these tax reforms will play out and whether they will achieve their intended goals. However, the implementation of a global minimum tax on multinationals marks a significant step in creating a fairer and more transparent international tax system.
Disclaimer: The information provided in this article is for informational purposes only and should not be construed as legal or financial advice.
