According to a study, corporation rates have decreased in 94 of the 111 countries and territories monitored by the OECD over the last 20 years. The average statutory rate declined from 28.3% to 20% throughout that time. The introduction of a global minimum tax rate, would get rid of this race to the bottom and potentially lead to big multinationals moving from smaller countries
What is Global Minimum Tax?
It is a global agreement reached by 136 nations to ensure that large corporations pay a minimum tax rate of 15%, making it more difficult for them to dodge taxation.
The COVID-19 crisis put a financial strain on the global economy, therefore governments tried to deter multinational corporations from moving profits and tax revenues to low-tax countries or tax havens.
The minimum tax and other conditions are intended to end decades of tax competition among governments to attract foreign investment.
Pillar One aims to return some earnings to the user or market jurisdiction. This is to address concerns that businesses generate value in market jurisdictions (especially through interactions with consumers and access to user data), but the associated revenue is subject to minimal taxation in the market jurisdiction due to a lack of physical nexus required under current rules.
Pillar Two advocates a worldwide minimum tax to address the incentives to move profits exclusively based on tax results. Countries competing for inward investment may provide tax breaks or lower tax rates. Furthermore, differences in domestic tax legislation may provide possibilities for multinational corporations (especially those that derive considerable value and profit from intangibles) to shift income and profit to these low-tax jurisdictions. This can lead to inappropriate tax competition and a “race to the bottom.”
Which Companies Will Be Affected by the Minimum Tax?
The minimum tax will apply to all businesses that undertake foreign business and have yearly revenues of more than €750 million. Multinational corporations will be required to pay a 15% tax rate on all profits earned worldwide, regardless of where the earnings are earned. Corporate subsidiaries based in tax havens pay extremely little in taxes under present laws, which benefits the corporation as a whole. This will not be possible in the future.
Check out our infographic below which takes a deeper look into the Global Minimum Taxation, what has been agreed upon, and how it will affect businesses.