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.
On Oct. 8, 136 countries and jurisdictions agreed to a proposal created by the Organisation for Economic Co-operation and Development (OECD) that includes establishing a 15% global minimum tax, starting in 2023. The proposal was developed to discourage tax-motivated profit shifting and base erosion by multinational corporations (MNCs).
The Oct. 8 agreement establishes a "two-pillar solution" focused on reforming tax rules to fit the digitalized economy, which first will be presented to the G20 Finance Ministers meeting in Washington, D.C., on October 13, 2021. Then, it will go to the G20 Leaders Summit in Rome scheduled for Oct. 30-31.
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 Organisation for Economic Co-Operation and Development (OECD) tax reform framework to impose a global corporate minimum tax on overseas profits by large multinational corporations (MNCs).
- On October 8, 136 countries and jurisdictions signed on to the OECD proposal, which includes a 15% corporate minumum tax.
- 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 corporate minimum 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 corporations (MNCs) 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 Organisation for Economic Co-Operation and Development [OECD] refers to these companies as multinational enterprises [MNEs]—a term basically analogous to the more familiar label multinational corporation.)
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. Lower-tax jurisdictions have promoted their lower rates to attract foreign investment 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 lower-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 significantly reduce, but not completely eliminate, 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, then economic competition among countries would be influenced more by the comparative quality and strength of their infrastructure and the skill of their workforce.
A global corporate minimum tax was part of a broader proposal developed by the 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. With the Oct. 8 agreement, the signatories grew to include Estonia, Hungary and Ireland—establishing support from all OECD and G20 countries. Kenya, Nigeria, Pakistan, and Sri Lanka have not yet joined the agreement.
The two-pillar solution
According to the OECD, its two-pillar solution "does not seek to eliminate tax competition, but puts multilaterally agreed limitations on it, and will see countries collect around USD 150 billion in new revenues annually."
Pillar One gives markets where global multinationals do business and earn profits some taxing rights over these enterprises, even if they are not the company's home country. To fall under these provisions, the MNC must have "global sales above EUR 20 billion [roughly $ 23.145 billion] and profitability above 10%."
Pillar Two sets the global minimum corporate tax rate at 15%. The global minimum tax will only apply to companies with revenues above €750 million ($868,095).
How a Global Corporate Minimum Tax Could Work
While a global corporate minimum tax would apply a specific rate of tax, its overall design could 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 benefits such 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. As noted above, the OECD drafters decided their agreement applies only to companies with revenues above €750 million ($868,095). They also established rules about 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 than 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 corporate 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 has now been set 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.
On Oct. 8, 2021, as noted above, 136 countries and jurisdictions agreed to the OECD plan; 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, also might serve well for the OECD tax.
Prospects for a Global Corporate Minimum Tax
The OECD plans schedules implementation of the new rules for 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 action from Congress 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--and its timing—remain uncertain.