The Global Minimum Tax, Explained
Set to prevent profitable multinational corporations (MNCs) from eluding their tax obligations, will the proposed global minimum tax affect the efforts of various countries in boosting their global competitiveness?
The current international tax system no longer fits “in a globalized and digitalized 21st-century economy,” the Organisation for Economic Cooperation and Development (OECD) said in a statement. Moreover, it has several loopholes allowing MNCs to reduce their tax bills.
In response to these concerns, the world’s richest economies have backed the global minimum tax proposal to reform the century-old international taxation rules. This will ensure that MNCs pay their fair share of tax wherever they operate and earn profits.
The global minimum tax proposal
The proposal for a new global tax system aims to collect a baseline level of revenue from multinational corporations.
Under the proposal, MNCs would be subject to a minimum tax of at least 15% regardless of their place of operations. The OECD expects that it can generate an extra $150 billion in tax revenues yearly
The deadline for finalizing the remaining technical work is in October 2021. Meanwhile, the target date for its full implementation is 2023.
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What happens if multinationals continue to pay lower taxes?
It’s a standard practice for many multinational companies to avoid tax by shifting their profits to lower-tax countries. And while it is true that lower-tax countries or the so-called “tax havens” can attract more foreign investments, they also lose at least as much as developed countries.
The United States Secretary of the Treasury Janet Yellen described this as a “race to the bottom.” Lowering global tax rates in exchange for creating a favorable business environment only drives tax revenues down for everyone.
But what if these multinational behemoths continue to pay taxes lower than the 15% global minimum rate?
Governments can still set whatever corporate tax rates they prefer even if the global minimum tax rate is already in effect. But if companies pay lower tax rates in a certain country, their home country could “top-up” their taxes to meet the minimum rate.
Consider this example:
If a U.S.-based company only pays 10% of corporate tax in Country X, the U.S. government could collect another 5% of the company’s profit. This scenario does not only remove the advantage of moving to a lower-tax country but also pressures countries to adhere to the international tax standards.
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A great first step
The introduction of a global minimum corporate tax, alongside efforts to ensure a fairer distribution of profits and taxing rights among countries, will provide the necessary support to different governments.
“The two-pillar package will provide much-needed support to governments needing to raise necessary revenues to repair their budgets and their balance sheets while investing in essential public services, infrastructure, and the measures necessary to help optimize the strength and the quality of the post-COVID recovery,” the OECD stated.
And this will become possible by making the most profitable, successful, and richest corporations in the world pay their fair share of tax. After all, they should be the biggest taxpayers, not the smallest taxpayers.
While this tax reform is expected to bring more stability to the international tax system, the process must not stop here. It’s important to keep the momentum going to achieve a better global economy.
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