Global Corporate Minimum Tax Definition

What is a global corporate minimum tax?

A global corporate minimum tax is a tax system created by international treaty in which
Countries acceding to the agreement would impose a certain minimum tax rate on the income of corporations, which is subject to the tax laws of the respective jurisdictions. Every country would be entitled to the income from the tax. The agreement would also require a definition of “income” and other technical rules.

A global corporate minimum tax would not be self-implementation. Each country would have to incorporate the rate and the rules into its own tax system. In the US, the global minimum corporate tax would have to be passed by Congress and put into effect by the President. In addition, international and bilateral tax treaties would have to be changed.

The central theses

• A global corporate minimum tax would apply a uniform tax rate to a defined corporate income base worldwide.
• The introduction of a global corporate minimum tax requires an international agreement and approval by each signatory country.
• Determining the taxable income base and the rules on cover, deductions, exclusions and other adjustments poses complex, legal, technical and political challenges.
• In July 2021, more than 130 countries agreed to support an OECD tax reform framework to impose a global minimum corporate tax on the foreign profits of large multinational corporations.
• The OECD framework aims to deter nations from tax competition through lower tax rates that lead to a shift in corporate profits and the erosion of the tax base.
• International business leaders believe a US treaty is essential for the success of a global minimum corporate tax.

Understand a global corporate minimum tax

A global minimum corporate tax is a standard minimum tax rate on corporate income determined by individual jurisdictions in accordance with an international agreement. Proponents of a global corporate minimum tax are pushing for it to be introduced to discourage multinational corporations from making foreign investment decisions based on lower tax rates and moving profits to countries with lower taxes regardless of where profits are made. [The OECD refers to these companies as multinational enterprises (MNEs)—a term basically analogous to the more familiar labelmultinational corporation (MNC).]

Tax competition promotes “race to the bottom”

Tax officials and economists around the world recognize that tax competition among nations for foreign investment has resulted in a “race to the bottom”. They fear that this competition will lead to significant revenue losses and jeopardize the funding of government functions in high-tax countries. Low-tax countries have encouraged their lower tax rates to attract foreign investment from higher-tax countries. In recent years, multinational corporations with income from intangible assets such as royalties from trademarks, patent and software licenses have localized and relocated such rights to lower-tax jurisdictions in order to avoid paying higher taxes from their home countries and the countries in to whom they are collected, their income is earned. Global rules that prevent profits from shifting to low-tax countries and allow countries where MNCs generate their profits to tax those profits and benefit from tax revenues would reduce tax competition and create a fairer distribution of tax revenues.

A global corporate minimum tax could significantly reduce tax-based competition between countries, but not completely eliminate it. If a common minimum tax rate offered multinationals little or no tax advantages by relocating investments and profits to countries with lower taxes, economic competition between countries would depend more on the comparable quality and strength of their infrastructure and the skills of theirs Affects workers.Currently, a worldwide minimum corporate tax is part of a broader proposal by the Organization for Economic Co-operation and Development (OECD) to prevent tax-motivated profit shifting and profit reduction by MNEs. On July 9, 2021, the United States and 132 other countries supported the proposal.

How a global corporate minimum tax could work

While a corporate minimum tax would set a specific tax rate, its overall design can take different forms and have different effects. In general, besides the tax rate, the most talked about feature of a tax system is the definition of the appropriate tax base. In theory, income tax should be levied on the taxpayer’s net economic income. But an agreement on what constitutes such an income is difficult to reach,
maybe impossible.

Challenge: definition of the tax base

The definition and calculation of taxable income in U.S. tax law includes many types of deductions, exclusions, exemptions, credits, temporary provisions, incentives, and other special provisions. These provisions were often enacted in order to promote social policy measures such as environmental protection or employee benefits or to serve special interests through advantages such as the tax-free treatment of similar exchanges or oil consumption payments. Changing economic conditions and political winds lead to frequent changes in US rules. As a result, there is little claim that these rules provide an accurate economic measurement. Rather, they show the complexity of determining a tax base.

Recognizing the complexities of the U.S. Tax Code and recognizing that its numerous income adjustments have allowed some wealthy taxpayers to legally evade any tax liability, the Biden government has proposed adding a corporate minimum tax to the Internal Revenue Code. This tax is intended to prevent profitable companies from paying little or no taxes. The proposal would use “book income”, ie financial income calculated in accordance with generally applicable accounting principles, as the assessment base for the minimum domestic corporate income tax. Only large companies with high profits – but little or no taxable income – would be subject to the tax.

The tax laws in other countries also differ in terms of design and complexity, which leads to very different income tax bases and rules. However, in order to be recognized and accepted as fair, a global corporate minimum tax requires a uniform definition of income. The drafters of a global corporate minimum tax must also decide whether it applies generally or only to multinational companies with revenues above a certain threshold; whether some industries or regions are excluded; and how it is implemented, changed and enforced.

Minimum tax structure: comprehensive or targeted

In its simplest form, a global corporate minimum tax could be structured in such a way that countries do not impose a rate lower than a certain rate on all corporate income, regardless of whether it is generated domestically or abroad. This approach, which would remove control of domestic corporate taxation from countries, would be a major encroachment on national sovereignty.

It is more realistic that the current OECD framework for a global minimum tax has a narrower, more targeted structure. Since the aim of the OECD is to discourage tax competition, the OECD plan provides that the foreign income of multinational corporations will be taxed at the minimum prescribed rate, which is at least 15%. Assuming that a country’s regular corporate tax rate is 10%, the OECD would oblige the country to “top up” its corporate tax on income earned abroad by a further 5%, for a total of 15%. On July 9, 2021, both the G7 and G20, representing the world’s largest economies, advocated the development of an international tax reform framework by the OECD that would provide for a global minimum corporate tax to set a minimum tax rate on the foreign income of multinational corporations.

Final agreement on the OECD plan is not planned for later in the year, and detailed tax accounting rules have yet to be developed.Since the global OECD minimum corporate income tax only affects large multinational corporations, generally publicly traded companies, the choice of the Biden administration, which is shown as the minimum tax base in official financial reports, could also benefit the OECD tax.

Prospects for a global minimum corporate tax

The OECD’s timetable for the implementation of its tax reform proposal provides for a final agreement in autumn 2021 and implementation in 2023. With the plan requiring many countries to change their tax laws, this time may be too optimistic. Additionally, U.S. involvement, essential to the plan’s success, depends on action by Congress and is likely to be opposed by Republican lawmakers and business skeptics. The US passage will likely require Democratic unanimity to pass necessary tax law changes through the reconciliation process. However, Treasury Secretary Janet Yellen believes American corporations “will tell members of Congress, please approve this,” according to Bloomberg.The fate of the global OECD minimum corporate tax is uncertain for the time being.