Effective January 1, a groundbreaking global tax reform has been enacted, representing a significant milestone in the quest for equitable taxation of large multinational corporations. This historic agreement, forged nearly three years ago by an impressive coalition of nearly 140 nations, has now been set in motion in several key economies. The participating jurisdictions include the European Union, the United Kingdom, Norway, Australia, South Korea, Japan, and Canada. Surprisingly, even countries traditionally recognized as tax havens, such as Ireland, Luxembourg, the Netherlands, Switzerland, and Barbados, with historically low corporate tax rates hovering around 5.5%, have committed to embracing this initiative.
Notably, the two economic giants, the United States and China, are yet to provide full commitment to this global tax reform, despite expressing their support for the deal in 2021. The groundwork for this unprecedented global tax initiative was laid in April 2021 when U.S. Treasury Secretary Janet Yellen proposed a minimum tax rate of 21% for companies. Building on this momentum, during the summer of the same year, the G20 nations rallied behind the Organization for Economic Cooperation and Development's (OECD) recommendation for a 15% minimum tax, securing support from 138 countries.
While some critics argue that the prescribed 15% rate falls short of addressing the complex tax issues at hand, proponents view the global minimum tax as a pivotal step in rectifying long-standing concerns related to tax fairness. The agreement, under the watchful eye of the OECD, specifically targets multinational corporations boasting a turnover exceeding 750 million euros. The mandated 15% corporate profits tax is poised to enhance annual tax revenues by an estimated 9%, potentially unlocking up to $220 billion in additional revenue on a global scale.
At the heart of this transformative agreement lies a fundamental principle: irrespective of the jurisdiction where a multinational declares its profits, it is bound to be subject to the same minimum tax rate. Analysts, including Jason Ward from the Center for International Corporate Tax Accountability and Research, have lauded the reform's meticulous design, underlining its potential to curtail the incentives for companies to exploit tax havens.
The agreement operates on two distinct pillars: the first is designed to incentivize companies to contribute more taxes in the locations where they conduct their business, promoting a tax structure aligned with actual economic activities. The second pillar establishes a global minimum tax rate, ensuring that if a company pays less than 15% in taxes in a foreign country where it has a subsidiary, its home country will cover the difference to meet the stipulated 15% threshold.
However, as with any groundbreaking reform, concerns have emerged regarding potential loopholes and exceptions. Will Morris of research firm PwC highlights the possibility of tax competition shifting towards subsidies and credits granted by countries vying to attract investment.
The EU Tax Observatory has projected a substantial increase in tax revenue for the European Union, estimating it to be close to €50 billion. Globally, estimates indicate an influx of around €200 billion. Despite being hailed as a "game changer" in the fight against multinational tax avoidance, critics, including French economist Gabriel Zucman, director of the EU Tax Observatory, express reservations about perceived gaps in the deal, which they believe may limit its effectiveness.
Zucman specifically cautions that multinational companies might exploit these gaps, continuing to shift profits to tax havens with lower rates. He points out that certain countries still offer corporate taxes below 15%, citing exemptions introduced shortly before the 2021 deal was finalized. Notably, these exceptions could significantly benefit nations like the Netherlands and Ireland, recognized as the world's two largest profit-shifting destinations.
In response to these critiques, Zucman advocates for closing the identified loopholes and increasing the minimum tax rate to 25%. Additionally, he suggests extending the concept of a global minimum tax to the wealth of billionaires, thereby preventing them from evading taxes. Despite these critiques and challenges, the global minimum tax is acknowledged as a valuable lesson for future international efforts aimed at combating tax evasion and avoidance, signaling a collective stride towards a more equitable global tax landscape.
By fLEXI tEAM