Who stands to benefit from the new global tax rate?
Why is it getting so much support from the international community?
The attendees of the recent G7 summit in 2021 agreed to set a global minimum corporate tax rate at 15% on a country-by-country basis. This agreement was heralded as a significant moment in the bid to end the 30-year race to the bottom of corporate taxes.
Initially proposed by U.S. President Joe Biden as a means of generating financial stimulus, the new tax framework is seen as an effective means of preventing multinational businesses from setting up in tax havens to avoid local taxes. However, a great deal of work remains to be done to persuade countries outside the G7 and to roll out the tax initiative.
Significant progress was made during a recent Organisation for Economic Cooperation and Development (OECD) meeting, with 130 jurisdictions giving the go-ahead for the setting of the minimum corporate tax rate. And there’s further optimism about the political endorsement of the agreement by internal representatives attending the upcoming G20 meeting in Venice.
Here are some details about the global tax rate reduction with a few predictions on who stands to benefit.
How have the OECD responded to the new tax proposals?
The majority of international representatives participating in the OECD discussion of tax rate changes were in agreement over the 15% figure.
It was suggested that setting the global minimum corporation tax rate could result in a yield of around $150 billion in annual global tax revenues. The update of taxation rules applying to major multinational businesses is expected to allow for the transfer of an estimated $100 billion in profits to the countries in which they are based.
Joe Biden said, “With a global minimum tax in place, multinational corporations will no longer be able to pit countries against one another in a bid to push tax rates down. They will no longer be able to avoid paying their fair share by hiding profits generated in the United States, or any other country, in lower-tax jurisdictions.”
These views were echoed by the OECD, with the suggestion that countries will be able to use the minimum rate for the protection of their tax bases. It was suggested that the new framework will be of great support to those countries looking to “repair their budgets and their balance sheets” in the continued recovery from the pandemic.
OECD Secretary-General Mathias Corrmann said, “after years of intense work and negotiations, this historic package will ensure that large multinational companies pay their fair share of tax everywhere.
This package does not eliminate tax competition, as it should not, but it does set multilaterally agreed limitations on it. It is in everyone’s interest that we reach a final agreement among all Inclusive Framework Members as scheduled later this year.”
What roadblocks will have to be overcome in the adjustment of taxes?
Each of the countries committing to the new framework will be responsible for the alignment of national policies. However, this may not prove straightforward in the US, where Republicans have said that they’re far from satisfied with the corporation tax adjustment.
Texas Republican Kevin Brady said that Biden has “already given up significant US ground.” He suggested that the rollout of the new framework would bring benefits to businesses based outside the US.
Brady rounded up by saying, “This is a dangerous economic surrender that sends US jobs overseas, undermines our economy, and strips away our US tax base.”
The success of the tax update will depend heavily on the persuasion of low-tax EU members such as Ireland, Estonia and Hungary. And we’re still to see developing countries such as Barbados, Saint Vincent and the Grenadines, Sri Lanka, Nigeria and Kenya agreeing to the new rate. However, these countries are at risk of being isolated due to the shared commitment of the wealthy nations.
It’s hardly surprising that Ireland is yet to agree, given the country’s success in the attraction of major US tech businesses with the offer of a 12.5% corporate tax rate. However, the Irish Finance Minister Paschal Donohoe said that he was open to discussion, to reach an agreeable outcome.
The French Finance Minister Bruno Le Maire said that he’d do everything within his power to convince those countries who are still to be convinced. "I ask them to do everything to join this historical agreement which is largely supported by most countries," he said.
Why are Mexico and China so positive about the tax rate?
Gabriel Yoro, the Deputy Finance Minister of Mexico, has welcomed the rollout of the international tax initiative, saying that it is excellent news for the Mexican economy. He suggested that the setting of the global minimum tax rate at 15% marked the favouring of stable and fair tax systems, claiming that it would result in the additional generation of 30b pesos in tax collection as a minimum.
Mr Yoro said that the Mexican economy could receive an injection of $1.5 billion should the minimum tax rate come into effect. However, he didn’t commit to a timeframe for the expected financial boost.
International commitment to the new tax framework is also expected to benefit China, given that it will allow for the generation of greater tax revenues and regulatory scope over the tech sector. He Weiwen, a representative of the China Society for World Trade Organization Studies said that the deal came as positive news at the end of a lengthy campaign to establish a fairer tax system suited to the digital age.
The adjustment of the corporation tax rate may well allow the Chinese government to assume greater control and prevent multinational businesses from dodging their financial obligations by setting up accounts in other countries. Tax havens such as those in the Cayman Islands were cited as “the black holes of global businesses, causing losses to governments around the world.”
He Weiwen said that although the G7 agreement marked a positive start, it didn’t necessarily mean that the framework would be widely accepted or implemented. "First, it will require global agreement and collaboration, including from the tax havens that reap benefits from the current system. Second, it will also need legislatures across the globe to make actionable plans," he added. "The G7 deal is a good start, but its deals don't always deliver results.”
What are the prospects for the global economy?
Prospects for the updated taxation system should become clearer when international representatives come together in Venice. Supporters of the tax system are hoping that technical details can be agreed upon by October, with the framework being applied internationally from 2023.
It will be interesting to see whether international objections can be overcome and how much of an impact the new framework will have on tax avoidance and evasion. Countries will inevitably keep on attempting to lure big businesses with tax incentives. However, such incentives may not have the same level of appeal, given that corporation tax rates may only be reduced to 15%.