In an effort to root out global corporate tax avoidance, officials from 130 countries agree to a global minimum tax.
Treasury Secretary Janet Yellen announced July 1 of this year an agreement by 130 countries to support a U.S. proposal for a global minimum tax (GMT) on corporations. Although not explicitly set, the Biden Administration has pushed for an actual tax rate of at least 15% (WSJ).
In a White House Statement, President Joe Biden thanks the signatories of the Paris Organisation for Economic Co-operation and Development (OECD) statement, which include 90% of the world’s economy. Biden’s proposed Made in America tax plan calls for raising the U.S. corporate tax rate to 28% from 21%, and the minimum tax on U.S.-based companies’ foreign profits to 21% from 10.5%.
Signatories for the proposed overhaul include all of the Group of 20 major economies, including China and India. In all, the OECD estimates that governments lose revenue of between $100 billion and $240 billion to tax avoidance each year.
A broad-based GMT is expected to largely eliminate tax shopping, or the practice of relocating headquarters to lower-tax rate jurisdictions. Multinational corporations “will no longer be able to avoid paying their fair share by hiding profits generated in the United States, or any other country, in lower-tax jurisdictions,” the Statement says.
The 130-nation deal also includes a framework to eliminate digital services taxes, which targeted the biggest American tech companies (WSJ).
Taxing digital goods and services has been problematic as each country chooses significantly different rules. In a roundup of practices, the Tax Foundation noted in March, 2021:
About half of all European OECD countries have either announced, proposed, or implemented a digital services tax (DST), which is a tax on selected gross revenue streams of large digital companies. Because these taxes mainly impact U.S. companies and are thus perceived as discriminatory, the United States has responded with retaliatory threats.
Because each country’s rules differ significantly, eliminating digital tax entirely simplifies global tax structure.
While the elimination of the Digital Tax is a win, the implementation of a Global Minimum Tax could significantly increase a company’s tax liability and alter previous tax planning structures put in place. Companies should begin forecasting impacts on their global tax expense and begin to reconsider their transfer pricing approach and structures.