Finance ministers from some of the world’s most powerful countries came to an historic agreement at the annual G7 meeting to align on a global minimum tax rate for multinational companies. The deal includes a provision that says businesses should pay tax where the sale is generated, not just where the seller has a physical presence or is headquartered.
Canada, France, Germany, Italy, Japan, the United Kingdom and the United States all came out in support of the 15% minimum corporate tax, which U.K. finance minister Rishi Sunak called on Twitter an “historic agreement to reform the global tax system to make it for the global digital age.” Although it is momentous and a good step forward, much arduous work remains ahead.
The proposed minimum effective tax rate of 15% puts tax havens and low tax jurisdictions on notice, and its accompanying measure promises to tax the biggest multinationals above a certain threshold and reallocate the proceeds fairly around the world.
This would supersede existing and outdated international tax rules and give countries a chance to collect tax from companies where they couldn’t before. The new proposal, supplementing, and perhaps, modifying the OECD’s original envisioned framework, known as the Unified Approach Blueprint under Pillars 1 and 2, will end decades of treaty and jurisdiction shopping by companies, and the lower tax rate competition race “to the bottom,” by countries, while eroding their own tax bases and diminishing indispensable revenue collection in the long-term. Many tax havens or fiscal paradises, as they are sometimes called, along with the more transparent and low tax, international financial centers, will be diminished, or outright eliminated.
The deal isn’t done, though. In fact, there are still a lot of questions before an actual major agreement can be reached, and many details to come, including:
- Which countries will benefit, including those beyond the OECD group?
- What top “100” companies will be selected and affected, beyond the digital tech giants, if any?
- How will countries be able to amend their own national complex tax codes and bilateral tax agreements network to fit this multilateral approach?
- What are low corporate tax countries like Ireland, an EU member, which has functioned as a low tax jurisdiction, (and with some harsh critics within the EU), for large corporations, going to do if a minimum tax above their own is approved by the OECD?
Beyond that, the plan faces several procedural and legal hurdles, including the July meeting of the G20 finance ministers and central bank governors, as well as consideration by the full membership of the Organization for Economic Cooperation and Development (OECD), although unanimous consent will not be necessary. Any accord must also have support from a majority of the 140 nations involved in negotiations under the OECD and after that, it would still be up to individual countries to pass laws to implement any agreement.
It will also become clear that the implementation of such a plan will be complex at best and challenging to execute, thus taking several years of adjustments and model adaptations. Refreshing a century-old tax system across borders will not be easy. The United States and other countries will have to re-write 15 years of global tax history to get everyone on the same page. What we have now are carefully crafted bilateral tax and trade agreements. What the proposal sets out is a vast change to a multilateral model. In fact, Italian Finance Minister Daniele Franco warned that implementation will take “some years.”
In addition, alleviating the mounting burden and clarifying the complexity of enforcement and tax collection will be a big part of making the deal stick, not to mention the expected rise in international tax disputes during said transition to a single and common global tax rate and its adjustment on a country-by-country basis. As one would expect, tax experts will begin to reengineer their tax planning techniques, so as to spot new gaps and systemic vulnerability in a global regime that’s already riddled with complexity. Simplification and clarity are both needed to avoid the global tax system collapsing under its own weight.
But those aren’t the only hurdles. Countries like Ireland, offering low corporate tax rates like a 12.5% corporate income tax on businesses, and others such as Luxembourg, BVI, Bermuda, etc., aren’t going to be happy watching their advantage slip away since they would have to raise their CIT to reach the minimum threshold. Many countries could resist signing on to the plan and there isn’t much the OECD can do about it. Even if an agreement is reached with a majority of member countries, the Ireland’s of the world don’t have to play along given that they may not sign or accede to the proposal.
Experience has shown that to reach a global tax agreement like this one, takes a tremendous amount of time, compromise and “economic” diplomacy. This deal is no exception. It will take time to finalize a massive shift in the way the world handles cross-border taxes. But certainly, a necessary and significant step to fiscal policy stabilization in a global digital economy.
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