After competing for the lowest tax rates for years, 132 countries holding 90% of the world’s GDP have agreed to a framework for a global minimum tax on corporations. The plan, described in an OECD Statement, is a two-pillar package that would target income that goes untaxed and would impose a 15% minimum tax. The minimum tax is estimated to generate around $150 billion in additional global tax revenues annually.
“The framework updates key elements of the century-old international tax system, which is no longer fit for purpose in a globalized and digitalized 21st-century economy,” the OECD release observes.
Seven countries in the group considering the plan did not sign on, including Ireland, Estonia, Hungary, Barbados, Sri Lanka, Nigeria and Kenya. Ireland was the first European country to start the “race to the bottom” in the late 1990s when it lowered its corporate tax rate to 12.5%, effective in 2003.
Two Pillars
The plan has two main pillars that address nexus and minimum rates. Pillar One would re-allocate some taxing rights over multinational enterprises (MNEs) from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there. The rule would apply to MNEs with global turnover (total revenues) above 20 billion euros and profitability above 10% (i.e., profit before tax/revenue). The turnover threshold may be reduced to 10 billion euros after a review that will take place in 7 years.
Exclusions are provided for the extractives industry, such as oil, gas and mineral extraction, and regulated financial services industries.
Taxing rights on more than $100 billion of profit are expected to be reallocated to market jurisdictions each year, according to the OECD. This pillar would particularly affect multinationals with business models closely linked to the digital economy like Facebook, Google and Amazon.
Pillar Two would put a floor on competition over corporate rates through the introduction of a global minimum corporate income tax rate that countries can use to protect their tax bases. The two-part rule includes 1) an income inclusion rule which imposes a top-up tax on parent entities with low-tax separate business units, and 2) an undertaxed payment rule which denies deductions to the extent of low-tax income of a constituent entity. These rules will apply to MNEs that meet a threshold of 750 million euros in annual revenues.
The Biden Administration and Treasury Secretary Janet Yellen support the global minimum tax, with the following statement released by Treasury.
“Global minimum tax would end the race-to-the-bottom in corporate taxation, and ensure fairness for the middle class and working people in the U.S. and around the world. The global minimum tax would also help the global economy thrive, by leveling the playing field for businesses and encouraging countries to compete on positive bases, such as educating and training our workforces and investing in research and development and infrastructure.”
House Republicans are less enthusiastic. The top Republican on the House Ways and Means Committee, Rep. Kevin Brady (R-TX), said of the OECD’s newly announced framework for international taxation, “This is a dangerous economic surrender that sends U.S. jobs overseas, undermines our economy, and strips away our U.S. tax base.” With the lack of consensus between the two parties, it is unclear if the necessary approval of the multilateral agreement could pass the Senate.
What’s Next?
A detailed implementation plan, together with the remaining issues, will be finalized by October 2021. Implementation is expected to occur in 2023.