Are you expanding your business overseas? Do you sell to global multinationals? Then, make sure you pay attention to this change in global tax rates. The Organization for Economic Cooperation and Development (OECD) the G20 Finance Ministers, and 130 out of 139 countries have agreed to change the way international tax rules apply to multinational companies. The new system is designed to distribute more taxes paid to countries where products or services are sold, as opposed to paying taxes only in the multinational’s headquartered country.
There are two pillars of the agreement. Pillar 1 is focused on changing where large companies pay taxes; Pillar 2 includes the global minimum tax. According to the Wilson Center:
“Pillar 1 enables countries to tax between 20% and 30% of the profits of the world’s largest and most profitable companies above a 10% earnings margin, based on where a company makes its sales, rather than where it is incorporated. The deal would apply initially only to companies with revenue over $23.8 billion – essentially 100 companies. After seven years, however, that threshold would fall to 10 billion euros. Financial and extractive industries may be excepted (Hamilton, 2021).”
“Pillar 2 would apply a minimum 15% corporate tax rate to a much larger set of companies by the governments where those companies are headquartered, if a company has not paid 15% overall across its global operations. The goal is to remove incentives by those companies to shift profits between jurisdictions to avoid taxes. The full extent of companies covered by this arrangement is still to be determined (Hamilton, 2021)”.
This means very large US companies will pay less US taxes, but foreign companies will pay taxes on sales made to Americans. If countries with low tax rates such as Ireland, Hungary, and Estonia refuse to adopt these changes the Biden administration is proposing to raise taxes on companies based in these countries or others, that may refuse to sign onto the deal.
As a reference, In 2020, 35 countries had a top corporate tax rate below 15%.
Companies in the extractives sector (like oil, gas, and other mining companies) and financial services companies would be excluded from the policy. The proposed regulation also mentions companies “in the initial phase of their international activity” could be exempt from the global minimum tax, but this has not been approved.
Despite the agreement on the elements of these changes many details must be worked out and agreed upon. It is recommended you stay abreast of this topic as a global business leader. As you can see, this new collaborative policy on global tax has significant implications for global businesses.
You can find articles on this subject in the news. Two well-regarded resources are as follows:
Hamilton, D. (2021, July 8). Rewriting Global Tax Rules: It Ain’t Over Til It’s Over. Retrieved from: https://www.wilsoncenter.org/article/rewriting-global-tax-rules-it-aint-over-til-its-over
Kallen, C. (2021, August 24). International Tax Proposals and Profit Shifting.
Retrieved from: https://taxfoundation.org/international-tax-proposals-profit-shifting/