Towards a global corporate tax and the end of tax havens

International Tax Reform: Towards a global corporate tax and the end of tax havens?

After more than a decade of talks, 130 out of the 139 countries that had entered into negotiations signed the new OECD reform concerning a harmonization of the new global tax treaty, this July 10 in Venice. These 130 jurisdictions alone represent 80% of GDP

The idea of ​​this reform tends to make multinationals pay a tax qualified as “fair” regardless of the country where they operate.

For years, a debate has animated the OECD: what international tax rules to impose on multinational companies?

The beginning of the month has been hectic. The member countries of the Organization for Economic Co-operation and Development, also called the OECD, have agreed on the full implementation of a global minimum tax.

This new international tax scheme puts in place a global minimum corporate levy of 15% to deter large corporations around the world from set up in tax havens with low tax rates.

Statutory corporate tax rates in OECD countries

Statutory corporate tax rates in OECD countries

In fact, in the current system the American government considers itself to be at a disadvantage with certain American multinationals.

How and why?

Some multinationals have their headquarters in the US and their actual activities in countries where they have real business and customers. The result is that American multinationals would pay less tax to their government and more to others. In addition, the overseas profits of these same companies are taxed much more.

From 2000 to 2018, American companies made half of all foreign profits in seven low-tax jurisdictions: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland.

This is why the new OECD agreement forecast for capping a minimum overall tax of at least 15%, which would have the consequence of making more taxes payable to multinationals that generate significant profits in jurisdictions with low taxation.

All the G20 countries such as the USA, the United Kingdom, China and France have supported the initiative.

But some countries preferred to keep their own tax rate, as it is below 15%.

For example, we have Ireland with a corporate tax rate of 12.5% or Estonia which only applies a tax on distributed corporate profits.

These new rules call into question a century-old flawed international tax system that is not suited to the globalized economy of the 21st century.

US Treasury Secretary Janet Yellen said: “Today is a historic day for economic diplomacy.”

One reform, two pillars

Pillar 1 aims to redefine where multinationals pay their taxes and Pillar 2 sets the minimum tax rate.

  • Pillar 1: this pillar concerns multinationals and aims to make the distribution of tax payments fair. The aim is to reallocate taxing rights to the company’s country of origin and not let the countries where the companies operate, make their profits, control the tax payments. It was specified that multinationals making a profit of more than 100 billion dollars would be taxed in the country where the profit is made.
  • Pillar 2: this pillar concerns the global minimum tax. The new minimum tax rate of at least 15% would apply to companies with turnover above the 750 million euros ($ 889 million) threshold. It was the G20 countries that agreed to the 15%, while other countries are trying to get higher tax rates.

This historic agreement is supposed to come in support of the various governments who need these taxes to revitalize and revive their economies while investing in public services, infrastructure and all the measures necessary for post-Covid-19 reconstruction.

This deal could bring in more than $ 150 billion in tax revenue each year.

It has been implied that companies “in the initial phase of their internationalization” would be exempt from this minimum tax.

Certain sectors of activity would not be affected by these new laws – still under negotiation.

French Finance Minister Bruno Le Maire described it as “the most important international tax deal in a century” during a press conference.

US Treasury Secretary Janet Yellen spoke in stressing the US’s willingness to lower its corporate tax rate despite responses from other countries lowering their rates even further in return.

Multinationals tend to locate where tax rates are low, which represents a significant loss of revenue for governments in a race to the bottom for tax rates.

Within the European Union, for example, the average rate has fallen from 50% in 1985 to 22% today.

Evolution of the average corporate tax rate in the European Union

Evolution of the average corporate tax rate in the European Union

This agreement is finalized after years of discussion and ends the race for who will have the lowest tax rate.

The final and detailed plan is scheduled for October 2021.

The aim of this plan is to discourage multinationals from transferring their profits to jurisdictions with favorable taxation, regardless of the country where their activities are carried out.

The signing of this historic agreement marks the start of a “new world”. The intention behind this agreement is to prevent companies from seeking low and favorable tax rates. The goal is to get them to pay their fair share of tax regardless of where they conduct their business and where their head office is located.

The implementation process is likely to be long and is expected to come into force in 2023. Note that the last time the international tax rules were changed was in 1928.