Daily News Analysis

GLOBAL MINIMUM TAX    

12th October, 2021 Economy

Figure 2: No Copyright Infringement Intended

Context:

  • A milestone global deal to ensure big companies pay a minimum tax rate of 15% and make it harder to avoid taxation has been agreed under leadership of OECD.

Background

  • With budgets strained after the COVID-19 crisis, many governments want more than ever to discourage multinationals from shifting profits and tax revenues to low-tax countries regardless of where their sales are made.
  • Increasingly, income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to these jurisdictions, allowing companies to avoid paying higher taxes in their traditional home countries.
  • The minimum tax and other provisions aim to put an end to decades of tax competition between governments to attract foreign investment.

Application

  • The global minimum tax rate would apply to overseas profits of multinational firms with 750 million euros ($868 million) in sales globally.
  • Governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could “top up” their taxes to the 15% minimum, eliminating the advantage of shifting profits.
  • A second track of the overhaul would allow countries where revenues are earned to tax 25% of the largest multinationals’ so-called excess profit – defined as profit in excess of 10% of revenue.

Economic impact and execution

  • The agreement calls for countries to bring it into law in 2022 so that it can take e ect by 2023, an extremely tight timeframe given that previous international tax deals took years to implement. Countries that have in recent years created national digital services taxes will have to repeal them.
  • The OECD, which has steered the negotiations, estimates the minimum tax will generate $150 billion in additional global tax revenues annually.
  • Taxing rights on more than $125 billion of profit will be additionally shifted to the countries where they are earned from the low tax countries where they are currently booked.
  • Economists expect that the deal will encourage multinationals to repatriate capital to their country of headquarters, giving a boost to those economies.
  • However, various deductions and exceptions baked into the deal are at the same time designed to limit the impact on low tax countries like Ireland, where many US groups base their European operations.