Looking ahead to the new global minimum tax
National governments around the world have been debating significant changes to international tax rules that apply to multinational companies. Following a July 2021 announcement by countries involved in negotiations at the Paris-based Organization for Economic Co-Operation and Development (OECD), there was a further agreement last October, by more than 130 governments, on an outline for the new tax rules.
It seems clear that companies will, in the near future, pay more taxes in countries where they have customers and a bit less in countries where their headquarters, employees, and operations are. Additionally, the agreement sets up the adoption of a global minimum tax of 15%, which would increase taxes on companies with earnings in low-tax jurisdictions.
Governments are now in the process of developing implementation plans and turning the agreement into law. Mining companies are now seeking to understand what it will all mean for them.
Corporate taxation is a pretty abstract topic. The new “global minimum effective tax” represents one of the biggest-ever reforms to international corporate tax rules. The reform blueprint encompasses two “pillars” that aim to ensure all companies pay their fair share to help finance public goods.
The “first pillar” will ensure greater fairness in the allocation of taxing rights and tax revenue among the world’s countries. To stick with the pie metaphor, the first pillar is about who gets which piece of the pie. The new rules will ensure greater fairness in the international allocation of tax revenue. Such rules are particularly important for the taxation of tech companies – for example, companies that can reap extremely high profits from internet sales or ad clicks even in countries where they have no factories or other branches. Under the current rules, taxes are payable primarily in the countries where firms have a physical presence. This has to change. Companies should also pay taxes in the countries where they generate profits.
When large, multinational corporations end up paying very little tax because they can shift their profits to tax havens, this is unfair in the extreme: First, because money goes missing that is needed to pay for public goods such as schools, childcare facilities, hospitals, pensions, transport networks and well-kept streets. Second, because it is unacceptable when small businesses such as the local plumber or bookshop pay their taxes properly while wealthy corporations deploy tricks to save billions in taxes. This will now be put to a stop.
On 1 July 2021, a broad-based international agreement was reached by the members of the OECD’s inclusive framework on base erosion and profit shifting (BEPS), the body which has been working on this issue under the auspices of the OECD. This approach was approved by the finance ministers of the 20 leading advanced and emerging economies – the G20 – at their meeting in July 2021. However, some technical details remained open. These were successfully clarified at another meeting in October 2021. In addition, the participating countries agreed on a roadmap to implement the approved measures.
It has become crystal clear that the corporate tax rate will be 15%. No company will pay less than that in the end. The tax will apply to all companies that do business internationally and that generate annual revenues above €750 million. In future, multinational firms will have to pay a tax rate of 15% on all of the profits they make worldwide, regardless of where the profits are generated. Under current rules, corporate subsidiaries located in tax havens pay very little in taxes, which of course benefits the corporation as a whole. This will no longer be possible in future.
Various measures will be implemented to make sure that the tax is actually paid. If, for example, profits earned by a group subsidiary located in a tax haven are taxed at an effective rate of only 5%, then the new rules will come into play.
With a new tax rate of 15%, the country where the parent company is based will have the right to charge an additional 10% in taxes on the subsidiary’s profits. This will ensure that even those profits located in the tax haven are ultimately subject to an effective tax rate of 15%.
Continuing with the example cited above, let us say that some of the group’s rights are held by a subsidiary located in a tax haven. The subsidiary then receives regular royalty payments from other group companies located in countries with high tax rates. This allows the companies in high-tax countries to lower their profits, because they can deduct the royalties as business expenses. Tricks like this will no longer be possible in the future. Royalty payments will no longer be fully deductible expenses in a company’s home country if they are paid to a company based in a tax haven. This too will ensure effective taxation at no lower than the global minimum rate.
Critics have complained that some companies will still be able to use clever accounting methods to circumvent the rules and avoid paying taxes in countries where they make profits. This is not true. Steps are being taken to ensure that companies cannot use accounting tricks to avoid paying taxes. That is precisely what the new rules are designed to prevent.
Where necessary, tax authorities will look at a corporate group’s various business lines and assess their profitability separately. (This is referred to as “segmentation”). For example, authorities can focus on the highly profitable platform businesses of individual groups and treat the profits earned on these platforms as the tax base. It will not be possible to offset these profits against other business lines.
Recent media reports have highlighted the fact that some highly wealthy tech company owners pay less than five percent in taxes. This shows all the more how important it is for these firms to pay their fair share towards the financing of public goods. Newspaper editors, elected officials, and other opinion-shapers increasingly argue that it is unacceptable for mining firms to earn huge profits from dividends, capital gains and bonuses – while the general public goes empty-handed.