What Is a Global Corporate Minimum Tax?
A global corporate minimum tax is a tax regime established by international agreement whereby
countries adhering to the agreement would impose a specific minimum tax rate on the income of corporations subject to the respective jurisdictions’ tax laws. Each country would be entitled to the revenue generated by the tax. The agreement also would prescribe a definition of “income” and other technical rules.
A global corporate minimum tax would not be self-implementing. Each country would have to incorporate the rate and rules into its own tax system. In the United States, the global corporate minimum tax would have to be passed by Congress and signed into law by the president. In addition, international and bilateral tax treaties would require amendment.
- A global corporate minimum tax would apply a standard tax rate to a defined corporate income base worldwide.
- Implementing a global corporate minimum tax requires international agreement and enactment by each signatory country.
- Determining the income base subject to the tax and the rules on coverage, deductions, exclusions, and other adjustments presents complex, legal, technical, and political challenges.
- In July 2021, more than 130 countries agreed to support an OECD tax reform framework to impose a global corporate minimum tax on large multinational corporations’ overseas profits.
- The OECD framework is intended to discourage nations from tax competition through lower tax rates that result in corporate profit shifting and tax base erosion.
- International economic leaders consider U.S. agreement essential to the success of a global minimum corporate tax.
Understanding a Global Corporate Minimum Tax
A global corporate minimum tax is a standard minimum rate of tax on corporate income adopted by individual jurisdictions pursuant to an international agreement. Proponents of a global corporate minimum tax urge its adoption to discourage multinational companies from making foreign investment decisions on the basis of low tax rates and from shifting profits to lower-tax jurisdictions regardless of where profits are earned. [The OECD refers to these companies as multinational enterprises (MNEs)—a term basically analogous to the more familiar labelmultinational corporation (MNC).]
Tax competition fostering 'race to the bottom'
Finance officials and economists worldwide recognize that tax competition among nations to attract foreign investment has resulted in a “race to the bottom.” They are concerned that this competition is causing substantial revenue loss and endangering financing for government functions in higher-tax countries. Low-tax jurisdictions have promoted their lower rates to attract foreign investment away from higher-tax countries. Also, in recent years, multinationals with income from intangible property such as royalties from trademark, patent, and software licenses, have located and relocated such rights in lower-tax jurisdictions to avoid paying higher taxes imposed by their home countries and by the countries where their income is earned. Global rules that eliminate profit shifting to low-tax countries—and that enable countries where MNCs earn their profits to tax those profits and benefit from the tax revenues—would reduce tax competition and create a fairer distribution of tax revenues.
A global corporate minimum tax could reduce significantly, but not eliminate completely, tax-based competition among countries. If a common minimum tax rate provides MNCs with little or no tax advantage from moving investments and shifting profits to lower-tax jurisdictions, economic competition among countries would be influenced more by the comparative quality and strength of their infrastructure and the skill of their workforce. Currently, a global corporate minimum tax is part of a broader proposal developed by the Organisation for Economic Co-operation and Development (OECD) to discourage tax-motivated profit shifting and base erosion by MNCs. As of July 9, 2021, the United States and 132 other countries supported this proposal.
How a Global Corporate Minimum Tax Could Work
While a corporate minimum tax would apply a specific rate of tax, its overall design can take different forms and have varied effects. Generally, beyond rate, the most debated feature of a tax regime is its definition of the appropriate tax base. In theory, an income tax should apply to a taxpayer’s net economic income. But agreement on what constitutes such income is elusive,
Challenge: Defining the tax base
The U.S. tax code’s definition and calculation of taxable income involves many types of deductions, exclusions, exemptions, credits, temporary provisions, incentives, and other special rules. These provisions often were enacted to advance social policies, such as environmental conservation or employee benefits, or to serve special interests through such benefits as tax-free treatment of like-kind exchanges or oil depletion allowances. Changing economic conditions and political winds produce frequent changes to the U.S. rules. As a result, there is little pretense that these rules provide an accurate economic measurement. Rather, they demonstrate the complexity of determining a tax base.
Acknowledging the U.S. tax code’s complexity and recognizing that its many adjustments to income have enabled some rich taxpayers to legally avoid any tax liability, the Biden Administration has proposed adding a corporate minimum tax to the Internal Revenue Code. This tax is intended to prevent profitable companies from paying little or no tax. The proposal would use “book” income, i.e., financial income determined under generally applicable accounting principles, as the base for its domestic corporate minimum tax. Only large companies that report high profits—but little or no taxable income—would be subject to the tax.
Tax laws in other countries also vary in design and complexity, resulting in very different income tax bases and rules. However, to be recognized as fair and achieve acceptance, a global corporate minimum tax requires a standard definition of income. Drafters of a global corporate minimum tax also will have to determine if it will apply broadly or only to multinationals with revenues over a specific threshold; whether some industries or regions will be exempt; and how it will be implemented, amended, and enforced.
Minimum tax structure: comprehensive or targeted
In its simplest form, a global corporate minimum tax might be structured to require countries to impose no rate lower that a specified rate on all corporate income, whether earned at home or abroad. This approach, which would remove countries’ control of domestic corporate taxation, would be a significant incursion on national sovereignty.
More realistically, the present OECD framework for a global minimum tax has a narrower, targeted design. Because the OECD goal is discouraging tax competition, the OECD plan would require that multinational companies' overseas income be taxed at the prescribed minimum rate, which is agreed will be at least 15%. Thus, assuming a country’s regular corporate tax rate is 10%, the OECD would oblige the country to “top-up” its corporate tax on income earned overseas by an additional 5%, for a total 15% rate. As of July 9, 2021, both the G7 and G20, representing the world’s largest economies, endorsed the OECD’s development of an international tax reform framework that includes a global corporate minimum tax establishing a minimum tax rate on multinationals' overseas income.
Final agreement on the OECD plan is not scheduled until later in the year and detailed tax accounting rules have yet to be developed. Because the OECD global corporate minimum tax affects only large multinationals, generally public companies, the Biden Administration’s choice of standard “book” income as reported in official financial reports as a minimum tax base might serve well also for the OECD tax.
Prospects for a Global Corporate Minimum Tax
The OECD schedule for effecting its tax reform proposal calls for final agreement in the fall of 2021 and implementation in 2023. Because the plan requires many countries to amend their tax laws, this timing may be overly optimistic. Moreover, U.S. participation, which is essential to the plan’s success, depends on Congressional action and likely will be opposed by Republican legislators and business skeptics. U.S. enactment probably will need Democratic unanimity to pass necessary tax law changes through the reconciliation process. Treasury Secretary Janet Yellen, however, believes that American businesses "are going to be saying to members of Congress, please approve this,” according to Bloomberg. For now, the fate of the OECD global corporate minimum tax is uncertain.