The Future of Global Minimum Tax and Multinational Corporations

The “race to the bottom” of international tax rates may soon come to an end. The Organisation for Economic Cooperation and Development (OECD) is working with countries across the globe on a framework designed to level the playing field. Leaders from 130 countries backed a broad outline last month that will seek to overhaul rules for taxing international corporations.

In an effort to tackle the tax challenges surfacing from the digitalization of the economy, the G20 have been working over the last few weeks toward building consensus on a two-pillar approach as part of the initial framework. Pillar One addresses reallocation of profit and revises physical nexus rules, with concerns stemming from the portion of profits that should be taxed in market jurisdictions where consumers and users are located. Pillar Two seeks to ensure that multinational corporations pay a global minimum tax to put a floor on competition over corporate income tax.

Countries around the globe are trying to stem the so-called “race to the bottom,” which has multinational companies moving their corporate headquarters so they can lower their tax bills. To reduce tax avoidance, these leaders will now work to pass laws that require companies headquartered in their countries to pay a minimum tax rate of at least 15% in each country where they do business. 

Countries like Bermuda, the Cayman Islands and Ireland are some popular destinations for corporations looking for tax havens. The result of this tax strategy is a loss of worldwide government revenues estimated to be between $500 and $600 billion annually, according to the International Monetary Fund.

This issue of businesses shuffling their headquarters between countries is not new. It has made the headlines many times over the past 30 years or so, but the economic effects of the COVID-19 pandemic have made it a front-page issue. With so many individuals and small businesses struggling economically, the public’s demand for fairer taxation has become part of the debate.

A significant driver of the international tax debate is the way digital services are taxed, especially the services provided by digital giants like Facebook, Amazon and Google. The existing laws never anticipated that data would be the revenue-creating behemoth that it is or that most of the global tech giants would be U.S. companies.

President Biden’s proposed Made in America Tax Plan seeks to ensure that corporations, including the digital giants, pay their fair share of taxes.

Some of the main features of the Biden plan that affect multinational companies include:

• Enacting country-by-country minimum tax rates on offshore assets. Currently, companies headquartered abroad deduct 50% of their foreign income from their tax burden and may claim a tax credit of 80% of their foreign tax payments, no matter how large or small those tax payments were. That means that a company that claims an address in a country with no corporate tax at all can simply halve its tax burden. Adding more tax brackets would level the playing field.
  
• Modifying or eliminating the Tax Cuts and Jobs Act (TCJA) provisions incentivizing the offshoring of assets. The proposed changes would eliminate the Foreign-Derived Intangible Income (FDII) tax incentives and replace the Base Erosion and Anti-Abuse Tax (BEAT) with the Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD) tax.

Having international buy-in to a global minimum corporate tax is an important element of President Biden’s agenda. Currently, the OECD is overseeing the 140-nation effort to develop a framework for a new global minimum tax that would allow the countries where the sales are being made, rather than the one where the corporate headquarters are located, to get a bigger share of a corporation’s taxes. This is intended to prevent corporations from shifting profits from high-tax jurisdictions to lower-tax ones. Individual countries would rely on the OECD framework as they form their own tax legislation. Several key countries, including Ireland and Hungary, have not signed on. 

The OECD’s goal is to have its implementation plan ready by October 2021. No one knows yet what the final tax rate will be or whether it will be adopted by all of the participating countries. The hope is that it will be the beginning of international cooperation for the taxation of multinational corporations.

The stakes are high for multinational corporations operating in the United States. If these changes are enacted, there would be a big change in how multinationals report profits and revenue, how they are taxed, and what their compliance requirements will be.

Please contact us at (805) 963-7811 should you have any questions regarding these proposed changes.