This Monday marked the beginning of a new era in international tax policy, as multinational corporations are now subject to a minimal worldwide tax for the first time.
The historic change, negotiated by 140 nations, intends to close long-standing gaps and bring in an estimated $220 billion more income annually.
Nearly three years after the historic pact, major economies will start enacting an effective corporate tax rate of at least 15%, according to a Financial Times report.
This networked arrangement gives other nations the authority to impose “top-up” taxes in the event that a global corporation’s earnings in any country drop below this level.
The Organization for Economic Cooperation and Development (OECD), the driving force behind the reforms, projects a potential 9% increase in global tax revenue, translating to $220 billion annually.
Jason Ward, principal analyst at the Centre for International Corporate Tax Accountability and Research pressure group, praised the reform.
“It will reduce incentives from companies to use tax havens and incentives for countries to be tax havens,” he said, adding that it puts “a serious brake on what was a race to the bottom”.
The first wave of jurisdictions implementing the global minimum tax
The first wave of jurisdictions implementing the global minimum tax from January include the EU, UK, Norway, Australia, South Korea, Japan, and Canada. The rules will apply to multinational companies with an annual turnover of more than €750 million.
Several countries long seen as havens by multinationals will take part, including Ireland, Luxembourg, the Netherlands, Switzerland, and Barbados, which previously had a corporate tax rate of 5.5%.
Neither the US nor China have introduced legislation to do so yet despite backing the deal in 2021. However, the global reforms are designed to still have a significant impact.
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 mean that once some nations introduce the global rate, other countries have an incentive to do so because otherwise, participating nations can collect tax at their expense.
“Pillar two only needs a critical mass of countries to implement it,” said Pascal Saint-Amans, the OECD’s former tax chief. “Nobody has found a silver bullet where you can avoid it.”
While much depends on implementation and the response of multinational companies, preliminary analysis suggests participating countries that host significant low-taxed corporate profits will be the early winners.
“People weren’t thinking let’s reward Ireland for being a tax haven,” said Ward. “But that may be an unintended consequence.”
Manal Corwin, head of tax at the OECD, told the Financial Times that tracking where additional revenue ended up in the early stages would represent only a “snapshot” of the reforms.
“This will shift over time,” she said. “The future footprint is the value of what’s being delivered.” Corwin said that through the elimination of distortions in the system, she ultimately expected more taxes to be paid “where economic activities take place”.
The introduction of the reforms is also expected to increase tax competition between jurisdictions through 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, global tax policy leader at PwC US, said investment hubs would be likely to collect additional tax revenue under the new regime and “give that back to business” via another arm of government.
