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Global Minimum Tax, What You Need to Know

The Biden administration has released a summary of its proposed tax policy adjustments for businesses in the United States. It includes a proposal to establish a worldwide minimum tax rate for corporations, which may bring the U.S. completely on board with an initiative headed largely by international groups like the G-20 and the Organization for Economic Cooperation and Development.

The following are five factors to keep in mind when considering a worldwide minimum tax rate:

Global Minimum Tax Rate

A global minimum tax provides a system in which a business from a specific country must pay taxes on a certain percentage of its revenues, regardless of where and how those profits are generated throughout the world.

Consequently, a domestic corporation that shifts some of its activities to a low-tax jurisdiction overseas would have to pay the home country’s government the difference between the worldwide minimum tax rate and the tax paid overseas on its earnings.

For example, if a company in a country with a global minimum tax of 15% makes overseas earnings that are taxed at 5%, the government may charge the corporation an extra 10% to bring it into conformity with the minimum tax. Countries, including the United States, are already attempting to recoup some of the tax income lost when businesses move their earnings abroad. However, not much is expected by experts until there is a concerted effort made internationally.

The Biden administration announced that while many Nations have made significant incentives to work together to prevent tax competitiveness, the race to the bottom is unlikely to end until enough big economies accept a minimum tax on overseas earnings.

Why Global Minimum Tax Matters

The objective of a global minimum tax is to put a stop to what appears to be a 30-year corporate race to the lowest possible tax rates.

Over the years, different countries, notably Ireland and Switzerland, have implemented tax policies geared towards encouraging multinational investment by bringing down corporation tax rates. As a result, other nations have been compelled to decrease their rates to remain competitive.

Consequently, to attain business accounting benefits and maximize cash flow, several multinational businesses have transferred their assets, notably intellectual property rights, to countries that provide them low, or no-tax, treatment of the revenue generated by such assets. This makes it important to regulate the tax rates and international tax on a global level.

Impact of the Current Situation on Developed Nations

According to the Organization for Economic Cooperation and Development (OECD), base erosion and profit shifting techniques, often known as BEPS, cost nations around the world an estimated $100 billion each year in tax income. Naturally, it has a detrimental impact on the very competitiveness that tax officials are seeking to preserve.

According to Treasury Secretary Janet Yellen, “Competitiveness is about more than how U.S.-headquartered companies fare against other companies in global merger and acquisition bids. It is about making sure that governments have stable tax systems that raise sufficient revenue to invest in essential public goods and respond to crises, and that all citizens fairly share the burden of financing government.” 

The Practical Effect of Global Minimum Tax

Thornton Matheson, a senior fellow at the Tax Policy Center in Washington explained that if the world’s largest economies can agree on a global minimum, it would be a trend reversal from what we have seen over the last few decades. For years, countries have been adapting to a territorial design by decreasing their corporate income taxes. However, an agreement over the global minimum tax can put an end to this trend as countries adopt a worldwide design.

But before that can happen, several details need to be ironed out, including an acceptable number – or at least a range – for an international minimum tax. The Biden administration is pushing for a 28% rise in the domestic corporate income tax, which is paid after costs are subtracted, from 21%. According to the government, the worldwide minimum should be established at 21%. Both of these rates are much higher than the OECD’s minimum rates.

The Reaction of Business Groups

The notion of a global minimum tax has been met with skepticism by business lobbying groups in the United States, especially given the possibility of a hike in domestic tax rates under the Biden administration.

Business Roundtable President & CEO Joshua Bolten said his group’s members “welcome the administration’s focus on ensuring the international tax system creates a more level playing field for globally engaged U.S. companies, generating economic growth and opportunity for American workers.”

However, he emphasized that the U.S. should make a “secure agreement” from other plan participants on a global minimum tax that they will apply in their own companies, and that any minimum tax imposed in the United States should be consistent with the worldwide level.

Have additional questions? Connect with financial experts and advisors at Windes to understand the implications of global minimum tax on your local or overseas businesses.
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