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Big multinational companies will from Monday be subject to a global minimum tax for the first time, as landmark cross-border tax reforms go live, seeking to raise up to $220bn in extra annual revenue.
Almost three years after 140 countries struck a deal to close glaring loopholes in the international system, some major economies will from January start to apply an effective tax rate of at least 15 per cent on corporate profits.
Under a series of interlocking rules, if profit by a multinational is taxed below this rate in one country, other countries will be able to charge a top-up levy. The OECD, which drove the reforms, estimates it will increase annual tax revenue by as much as 9 per cent, or $220bn worldwide.
Jason Ward, principal analyst at the Centre for International Corporate Tax Accountability and Research pressure group, praised the “super smart design” of the reform. “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 €750mn.
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 per cent.
Neither the US nor China have introduced legislation to do so yet despite backing the deal in 2021. But 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.”
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, told the Financial Times 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.
“Tax competition will not die — it will shift to subsidies and credits,” Morris said.
This dynamic would lead to a lower amount of tax being collected by many countries than the OECD has predicted, Morris reckoned, and he was concerned business would be blamed. “There is going to be more angst from countries that business have been tax planning again rather than the revenue estimates are wrong,” he said.
Other exemptions were included during negotiations on the deal, such as a carve-out for “substance”, so the rules do not discourage investment in tangible assets such as manufacturing factories and machinery.
This carve-out has attracted criticism because it may allow companies to pay tax below the 15 per cent rate if they have sufficient real activity in low-tax countries.
Valentin Bendlinger, an academic who specialises in the global minimum tax, said that while the complex rules made its revenue effects uncertain, he expected “a compliance monster for both tax administrations and multinationals”.
Source: Economy - ft.com
