Digital Services

Global Minimum Corporate Tax To Begin In 2023

During the last days of October 2021, the members of the Group of 20 (G20) approved the concept of a global minimum corporate tax of 15 percent that was conceived by the Organisation for Economic Co-Operation and Development (OECD).

The G20 is a group of finance ministers and central bank governors from 19 countries and the European Union. The countries include the United States, Argentina, Australia, Brazil, Great Britain, Canada, China, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, and Turkey. These countries account for more than 80 percent of the world’s economic output.

OECD is an international organization that works with governments, policy makers and citizens, to establish international standards and create solutions for social economic and environmental disputes.

In October, 136 member countries of the OECD agreed on a minimum tax on global corporations that includes Internet companies like Google, Amazon, Facebook, Microsoft, and Apple. The pact is meant to make it more difficult for large corporations from avoiding taxes by creating offices in a low-taxing country or jurisdiction.

U.S. Corporations Should Expect A Tax Hike

The action means that many United States-based corporations will be paying more taxes than they do now and provide more tax revenues for developed countries. Developing countries are not expected to benefit much from the treaty. The agreement is specifically targeted toward businesses that have a global footprint.

The accord sets a minimum tax rate of 15 percent on the revenues of large corporations and will also increase income for most governments. It shifts tax revenues onto companies’ sales to consumers instead of where the firm is based.

The major benefactors are the rich countries of the world. It is projected that additional revenues for the U.S. from the minimum tax will be 15 times that of China. It is also believed that the total windfall for 52 developing nations would be close to $1.5 billion to $2 billion a year due to the new way tax revenues will be allocated.

The purpose of the policy is to minimize a businesses ability to lower their tax liability by recording their profits in low-tax countries such as Ireland. The globalization of the economy as allowed firms to relocation production into a number of countries. The advent of digital technology has sanctioned corporations to make sales in countries where they have little or no physical existence.

Expect A Battle In Congress

The deal requires legislation be passed in participating countries. Such an action by the United States Congress will be difficult because Republicans assert that the manner of sharing revenues presented in the agreement requires a treaty. For such a treaty to be approved, support from at least 17 Republications is necessary.

The Congress is expected to tackle the minimum corporate tax issue in two steps. The first, which is expected to occur this year, is to change the minimum tax on U.S. companies’ foreign income that was approved in 2017. Democrats are expected to want to raise the rate. A plan in the House calls for a 16.6 percent minimum tax rate.

The second step is expected to be problematic. It will require Congress to agree to changing the rules for where income is taxed. Analysts say that this would require a treaty, which will need a two-thirds vote in the Senate. So, some support from Republicans would be necessary.

Not All Countries Favor Pact

The concept of a global minimum corporate tax first gained support in 2013. Member countries of the G20 became frustrated by the situation after the global financial crisis of 2008.

The talks for such a tax were rocky and broke down several times. Reaching this agreement is therefore a major achievement.

It is believed that the agreement was attained because member countries of the G20 realized that cooperation was necessary to safeguard their capability to boost revenue necessary to enhance their economies.

The G20 also expects that the agreement will calm uncertainties for businesses. In recent years, countries have levied national taxes on digital businesses and a further increase was expected if there were no agreement.

Many developing nations in the G20 balked at the agreement because they believed that the minimum tax rate is too low. They argue that they won’t be able to collect the taxes they need and they don’t favor the new manner in which the tax revenues are shared, which targets only the very largest international companies.

The minimum tax rate could garner an additional €185.2 billion, which is equal to $213.9 billion of revenue for participating countries, says the EU Tax Observatory, a research organization. Most of the money will go to richer countries.

At this time, the United States has low corporate taxes when compared to the rest of the world. The Biden Administration is expected to raise taxes. In 2017, the U.S. cut the corporate tax rate to 21 percent from 35 percent. Biden has suggested that it be raised to 28 percent. According to the conservative Tax Foundation, the international average corporate rate is nearly 24 percent.

The OECD is expected to set a framework of policies they’ll use to implement the plan next year.