Global economy set to embrace effective corporate tax rate of 15%
By Felicia Nwosu
It is a new dawn as the global economy is set to experience remarkable shift in the implementation of the Global Minimum Taxation. Across the world, some multinational companies in major economies have started to embrace the global minimum tax of 15% on profits.
The major economies embracing the OECD-led reform include the EU, UK, Australia, South Korea, Japan and Canada.
According to a Financial Times’ report, the new global move is geared towards attracting investment, and is expected to raise annual tax revenue by up to 9%, or €201bn (£174bn/$220bn) worldwide.
The report noted that the reform, forged by 140 countries, aims to address longstanding loopholes and generate an estimated $220 billion in additional annual revenue.
The report stated that this interconnected systematize empowers other countries to levy “top-up” taxes if a multinational’s profits fall below this threshold in any jurisdiction.
Jason Ward, principal analyst at the Centre for International Corporate Tax Accountability and Research pressure group, praised the reform and said, “It will reduce incentives from companies to use tax havens and incentives for countries to be tax havens,” he said, adding that it puts “a serious brake on what was a race to the bottom.”
The first wave of jurisdictions implementing the global minimum tax from January include the EU, UK, Norway, Australia, South Korea, Japan, and Canada. The rules will apply to multinational companies with an annual turnover of more than €750 million.
Several countries long seen as havens by multinationals will take part, including Ireland, Luxembourg, the Netherlands, Switzerland, and Barbados, which previously had a corporate tax rate of 5.5%.
Neither the US nor China has introduced legislation to do so yet despite backing the deal in 2021. However, the global reforms are designed to still have a significant 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.
The rules mean that once some nations introduce the global rate, other countries have an incentive to do so because otherwise, participating nations can collect tax at their expense.
“Pillar two only needs a critical mass of countries to implement it,” said Pascal Saint-Amans, the OECD’s former tax chief. “Nobody has found a silver bullet where you can avoid it.”
Low-taxed corporate profits
While much depends on implementation and the response of multinational companies, preliminary analysis suggests participating countries that host significant low-taxed corporate profits will be the early winners.
“People weren’t thinking let’s reward Ireland for being a tax haven,” said Ward. “But that may be an unintended consequence.”
Manal Corwin, head of tax at the OECD, revealed that tracking where additional revenue ended up in the early stages would represent only a “snapshot” of the reforms.
“This will shift over time,” she said. “The future footprint is the value of what’s being delivered.” Corwin said that through the elimination of distortions in the system, she ultimately expected more taxes to be paid “where economic activities take place.”
The introduction of the reforms is also expected to increase tax competition between jurisdictions through credits, grants, or subsidies.
The OECD confirmed last year that the global minimum tax calculations will provide more favourable treatment for certain tax credits, notably some transferable credits contained in the US’s Inflation Reduction Act.
Will Morris, global tax policy leader at PwC US, said investment hubs would be likely to collect additional tax revenue under the new regime and “give that back to business” via another arm of government.
Recall that Nigeria, Ghana, South Africa, and other countries at the UN recently voted to take a greater role in international tax matters, in a move that threatens the ascendancy of the Organization for Economic Cooperation and Development (OECD), the body that has led these discussions for decades.
The US and China haven’t introduced the reform yet despite being among the 140 countries backing it originally. But the OECD believes that “a critical mass of countries” is enough to initiate the deal.
While low-tax countries may benefit in the early stages of the reform, the OECD expects more taxes to be paid in the long run where economic activities take place.
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