Large multinational corporations will be subjected to a global minimum tax for the first time ever, as groundbreaking international tax reforms take effect from today (1 January).
These reforms aim to generate an additional annual revenue of up to $220 billion.
Nearly three years following the agreement made by 140 nations to rectify significant flaws in the global system, from January, several major economies will begin implementing a minimum effective tax rate of 15 per cent on corporate profits.
According to a set of interconnected rules, should a multinational's profit be taxed at a rate lower than this in one country, additional taxes can be imposed by other nations.
The reforms, spearheaded by the OECD, are projected to boost yearly global tax revenue by approximately 9 per cent, equating to an increase of $220 billion globally.
Starting from January, the initial group of jurisdictions to enforce the global minimum tax comprises the EU, UK, Norway, Australia, South Korea, Japan, and Canada. These regulations will be applicable to multinational corporations with an annual revenue exceeding 750 million Euros, or around $830 million.
A number of countries, traditionally viewed as safe havens for multinationals, are set to participate. These include Ireland, Luxembourg, the Netherlands, Switzerland, and Barbados, the latter of which previously maintained a corporate tax rate of 5.5 per cent.
Despite their support for the deal in 2021, neither the United States nor China has yet enacted laws to implement it. However, the international reforms are still expected to have a substantial influence.
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 imply that as soon as certain countries implement the universal rate, it provides an impetus for other nations to follow suit. This is because if they don't, the participating countries have the advantage of collecting tax at their cost.
Initial assessments indicate that countries hosting significant low-taxed corporate profits stand to benefit early from the initiative, although the outcome largely hinges on the execution and the response of multinational corporations.
The implementation of these reforms is also anticipated to increase the tax rivalry among jurisdictions via 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, who is the global tax policy leader at PwC US, suggested that under the new system, investment hubs could potentially gather more tax revenue and subsequently “give that back to business” via another arm of government.
“Tax competition will not die - it will shift to subsidies and credits,” Morris said, Financial Times reported.
During the deal negotiations, additional exceptions were incorporated, including a provision for "substance" to ensure that the regulations do not deter investment in physical assets like manufacturing plants and machinery.
The exemption has drawn criticism as it could potentially enable corporations to pay taxes less than the 15 percent rate, provided they have substantial genuine operations in countries with low-tax rates.
Kuldeep is Senior Editor (Newsroom) at Swarajya. He tweets at @kaydnegi.
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