As part of landmark tax reforms, big multinational companies will be subjected to a global tax minimum for the first ever on Monday. The aim is to generate an extra $220 billion in revenue annually.
Nearly three years after 140 nations struck an agreement to close the most glaring gaps in the international system some major economies are starting to apply a tax rate effective of at least 15% on corporate profits from January.
A series of interlocking regulations will allow other countries to charge an additional levy if a multinational’s profit is taxed at a lower rate than this in a particular country. The OECD which pushed for the reforms estimates that it will increase tax revenues by up to 9 percent, or $220 billion worldwide.
Jason Ward, the principal analyst of the Centre for International Corporate Tax Accountability and Research, praised the reform’s “super-smart design”. It will reduce the incentives that companies have to use tax-havens, and for countries to become tax havens,” said Ward. He added that this reform puts a “serious brake” on what had been a race to bottom.
In the first wave, jurisdictions that will implement the global minimum tax in January are the EU, UK. Norway, Australia. South Korea, Japan, and Canada. The rules will be applicable to multinational companies that have an annual turnover greater than €750mn.
Multinationals have long viewed Ireland, Luxembourg and the Netherlands as safe havens. Barbados will also participate, with a previous corporate tax rate at 5.5%.
The US and China have not yet introduced legislation despite supporting the 2021 deal. The global reforms will still have an impact.
The deal overseen by the OECD in 2021 consists of two “pillars”. The first aims to get multinational companies to pay more tax where they do business, while the second establishes a global minimum Corporate Tax rate.
If some countries introduce the global tax rate, then other nations will be encouraged to do so, otherwise they can collect taxes at the expense of participating nations.
Pascal Saint-Amans said that the OECD’s former chief tax officer, Pascal Saint-Amans only needed a critical number of countries to implement Pillar 2. Nobody has come up with a way to avoid it.
Although much will depend on the implementation and response of multinational corporations, preliminary analysis indicates that participating countries with significant corporate profits taxed at a low rate are likely to be the early winners.
Ward said that people didn’t think to reward Ireland as a tax-haven. But that could be an unintended result.
Manal Corwin is the head of taxation at the OECD. He said that tracing where the additional revenue went in the beginning stages was only a “snapshot”.
She said that “this will change over time.” Corwin stated that the future footprint will be the value of the services being provided.
Credits, grants, and subsidies are also expected to be used by the government in order to encourage tax competition among jurisdictions.
Last year, the OECD confirmed that certain tax credits will be treated more favourably in the calculations of the global minimum tax. This includes some transferable tax credits included in the US Inflation Reduction Act.
Will Morris, PwC US’ global tax policy leader, said that investment hubs were likely to collect more tax revenue under the newly implemented regime and “give it back to business” through another government arm.
Morris stated that “tax competition will not go away — it will move to subsidies and credit.”
Morris was worried that business would be held responsible for the lower tax revenue collected by most countries than what OECD had predicted. Morris said that countries would be more upset if they thought business had been planning tax increases again than if the revenue estimates were wrong.
During negotiations, other exemptions such as “substance” were added to the agreement. This ensures that the rules don’t discourage investments in tangible assets like manufacturing factories and machines.
The carve-out is controversial because it could allow companies to pay less than the 15% tax rate if their real activities are in countries with low taxes.
Valentin Bendlinger is an academic specializing in global minimum tax. He said that the complexity of the rules makes its revenue effects uncertain. However, he expects “a compliance beast for both tax administrations as well as multinationals”.