Global Minimum Corporate Tax Rate – A New Era?

Recently, 130 of the world’s leading economies have agreed to ensure that multinational companies, including Big Tech, pay a global minimum corporate tax rate of at least 15 per cent. In total, this would lead to companies paying an additional $150bn a year in taxes (according to calculations). Following intense negotiations in Paris, the OECD has concluded that the rules are to be put in place by the end of 2022 and implemented in 2023.

The minimum corporate tax rate aims to tackle the issue of tax fairness worldwide. In particular, these issues have been previously raised by the European Commission following Apple’s high-profile tax battle in recent years (with the Irish tax bill overturned in July 2020). In general, the plan can be seen as popular with 130 of the 139 countries involved in the talks signing up, including all of the G20 countries agreeing with the proposed agenda. However, the 9 countries refusing to sign up include Ireland, Estonia, Hungary, Barbados, Kenya, Nigeria, Sri Lanka, Peru and St Vincent & the Grenadines.

There was considerable political pressure throughout the negotiations in Paris. Most notably, some tax havens and investment hubs, such as the Bahamas and Switzerland, signed up to the agreement. As a result, these countries are expected to lose significant revenues once the rules are implemented in 2023 due to the decrease in tax incentives for companies with the advantages gained from channelling revenues through low-tax jurisdictions being removed.

The Goal:

In general, the agreement was negotiated to guarantee that large MNCs are forced to pay their fair share of taxes across the globe. The global minimum corporate tax rate was championed by the United States under the leadership of President Joe Biden who was adamant on ensuring that corporations will be forced to refrain from forcing countries to compete and heavily push down tax rates to protect profits hence causing substantial losses to public revenue.

However, multiple carve-outs were agreed to during the negotiations. Crucially, it was agreed that countries could still use low taxes to incentivise countries to invest and that the same corporate tax regime will not be in place everywhere. Mathias Cormann, the OECD secretary-general, went to lengths to clarify that ‘tax competition’ between countries is not eliminated under the new plan to accommodate the various interests of smaller economies and developing jurisdictions but there are multilaterally agreed limitations placed on such competition.

The Details:

In essence, the deal replicates the agreement forged by the G7 in June 2021 but there has been substantial detail added and special rules and regulations for certain industries and companies. Importantly, the agreement will enable countries to have the right to tax large companies based on where they earn their revenues rather than where their headquarters are located; this is a major ‘jurisdictional change’. 

One notable change is that only the biggest companies are initially impacted by this ‘jurisdictional change’. Namely, the tax rate will only apply to multinational corporations that have annual revenue exceeding €20bn and pre-tax profit margins of a minimum of 10 per cent (though the threshold will fall to €10bn after seven years). Therefore, the element of the deal forcing the largest MNCs to pay more tax where they operate rather than their location will only initially apply to the world’s biggest company and not all of them. Nevertheless, the agreement established that a minimum tax rate of 15% will apply to all companies with an annual revenue of €750m or more. Whether countries choose to apply it to companies of all sizes or not is solely up to their government’s discretion.

Furthermore, the OECD has proposed a carve-out from the minimum tax plan depending on ‘substance’. This carve-out aims to keep the interest of China, India and multiple eastern European countries by stating that the tax rules do not apply to investment into tangible assets, such as manufacturing factories and machinery, to ensure that incentives on corporate tax investment are still viable.

Finally, the OECD agreement that was signed stated that companies in regulated financial services, mining alongside the oil and gas sector would be excluded from the tax plan. 

Next Steps:

Overall, the plan will fundamentally change how multinational corporations are taxed around the world. However, there are still some problems that need to be resolved at the next meeting of the G20 finance ministers in Venice this month and the G20 leaders’ meeting in October.

Firstly, the refusal of three EU member states is a concern for Brussels and could pose a practical problem. In particular, Ireland is an important jurisdiction due to its low corporate tax rate in recent years.

Secondly, the global agreement is set to supersede the national digital taxes that some countries have recently introduced. The question is now whether these countries will give up these digital taxes to accommodate the new global corporate tax plan.

Thirdly, another major concern is regarding the practical aspect of the tax rate. The agreement signed pledged ‘appropriate coordination’ yet it has been noted that the implementation of the plan may not be straightforward due to each country legislating at its own pace. In particular, the US must seek congressional approval for parts of the agreement and some countries are reluctant to continue until the US legislative process has succeeded.

Nevertheless, the importance of the global minimum corporate tax rate should not be underestimated as it marks a notable step towards tax justice.

Bobby Zhu