The global minimum corporate tax rate, or simply the global minimum tax (abbreviated GMCT or GMCTR), is a minimum rate of tax on corporate income internationally agreed upon and accepted by individual jurisdictions. Each country would be eligible to a share of revenue generated by the tax. The aim is to reduce tax competition between countries and discourage multinational corporations (MNC) from profit shifting to achieve tax avoidance.
Global minimum tax 2023
On 8 October 2021, 136 countries agreed to a plan of Organisation for Economic Co-operation and Development (OECD) to implement 15% global minimum tax rate, starting in 2023. 4 countries are yet to sign up (Kenya, Nigeria, Pakistan, and Sri Lanka). A two-pillar solution has been implemented by the OECD to address issues connected to digitalization of the economy. Consenting governments are currently discussing implementation plans and turning the agreement into law. For example, the European Union is on its way to developing new rules for this new agreement and getting deadlines for the implementation. A unanimous agreement among the 27 EU member states is still required but it should be done by 2023. For Switzerland, a constitutional amendment is required to adopt this new accord, and it will likely wait until 2024 for the Swiss rules to change. Finally, the United States is studying changes to its own approach but it is not yet known when these changes will be adopted.
Why was it imposed? International tax rules developed in the environment of the last century do not fit the purpose of the modern economy. Digitalisation has created new problems: scale without mass (growth of firms without physical presence), reliance on intangible assets or centrality of data. The previous and new technologies have facilitated tax avoidance through profit shifting to low-tax jurisdictions. The result is a “race to the bottom”, a tax competition among countries to attract foreign investment. This is causing loss of tax revenue and purportedly the endangerment of government functions in higher-tax countries.
How will the tax operate? The tax works on a two-pillar system which should improve current corporate taxation rules. These rules prevent countries from taxing MNCs' income generated in their jurisdictions unless MNCs have nexus (physical presence) in that country.
Pillar one (Reallocation of profits) Pillar one is concerned with new profit allocation rules applying to the largest and most profitable MNCs with worldwide revenue greater than €20 billion and profitability above 10%. This amount could also be in 7 years reduced to €10 billion if the implementation succeeds.
This pillar redistributes excess profits of MNCs to jurisdictions, where consumers or users are located, regardless of whether firms are in those jurisdictions physically present. The amount redistributed will be computed as 20-30% of the residual profits of companies in scope. This should result in fairer distribution of profits and taxing rights among countries. Taxing rights on more than $125 billion of profit should be reallocated to market jurisdictions each year.
Pillar two (global minimum corporate tax of 15%) The pillar two introduces a new global minimum corporate tax of 15% for corporations in scope. It will apply to multinational groups with revenue exceeding EUR 750 million. This regime is estimated to generate around US$150 billion additional tax revenues annually. It addresses the relationship between parent MNCs and their subsidiaries. If the MNC's subsidiary has low-taxed income, then the MNC must pay a top-up tax to increase the tax rate related to the income to 15%. According to current rules subsidiaries located in tax havens pay little to no taxes. This will not be possible in the future. The global minimum tax consists of three principal rules: inclusion rule (IIR), the undertaxed payments rule (UTPR) and the subject to tax rule (STTR). IIR works in a similar and complementary fashion as the UTPR. Both refer to the already mentioned 15% minimum effective tax rate. Together they are referred to as GloBe.
Income inclusion rule (IIR) The IIR is the primary rule. It will be applied and collected in the jurisdiction of the parent MNC. However, it will not apply to the head office itself. This rule introduces a top-up tax which is applied to the head office if the effective tax rate of all the consolidated companies and branches in each jurisdiction doesn't reach the minimum tax of 15%. The top-up tax is then based on the minimum tax. This rule should ensure that the MNC group is subject to a minimum tax regardless of where it is headquartered and without giving risk to double or over taxation.