Global minimum tax

What Is Global Minimum Tax?

The global minimum tax is an internationally agreed-upon minimum rate of corporate income tax that large multinational corporations (MNCs) are expected to pay on their profits, regardless of where those profits are generated. This initiative falls under the broader financial category of international taxation and aims to curb harmful tax competition among countries. The core idea behind the global minimum tax is to ensure that even if an MNC operates in a jurisdiction with a very low or zero statutory tax rate, its overall effective tax rate will still meet a globally agreed floor, typically 15%. This framework seeks to reduce the incentive for corporations to engage in profit shifting to low-tax areas.

History and Origin

For decades, countries have engaged in a "race to the bottom," continually lowering their corporate income tax rates to attract foreign investment and encourage companies to establish a presence within their borders. This led to scenarios where large multinational corporations could strategically move profits to tax haven jurisdictions, resulting in little to no tax being paid on significant portions of their global revenue.

In response to these challenges, the Organisation for Economic Co-operation and Development (OECD) and the G20 countries launched the Base Erosion and Profit Shifting (BEPS) project in 2013 to develop a comprehensive package of measures to tackle tax avoidance. By 2020, members of the BEPS Inclusive Framework agreed on a two-pillar strategy to update international tax rules for a globalized and digitalized economy. Pillar Two of this initiative focuses on the global minimum tax. In October 2021, 137 countries and jurisdictions formally agreed to a plan to implement a global minimum corporate tax rate of 15% for large multinational enterprises¹⁵. This landmark agreement marked a significant step toward international tax coordination, designed to reduce disparities in effective tax rates and disincentivize companies from relocating profits solely for tax advantages¹⁴. The OECD subsequently released detailed Global Anti-Base Erosion (GloBE) Model Rules to guide the implementation of this framework.¹³

Key Takeaways

• The global minimum tax sets a floor of typically 15% on the effective tax rate paid by large multinational corporations.
• It aims to reduce profit shifting to low-tax jurisdictions and curb harmful tax competition among countries.
• The framework was developed under Pillar Two of the OECD/G20 Base Erosion and Profit Shifting (BEPS) project.
• The rules primarily apply to multinational enterprises with annual consolidated group revenue exceeding EUR 750 million.
• Implementation involves complex mechanisms like the Income Inclusion Rule (IIR) and Undertaxed Payments Rule (UTPR), which allow home countries to apply a "top-up tax" if the effective tax rate in a foreign jurisdiction falls below the minimum.

Interpreting the Global Minimum Tax

The global minimum tax is not a direct tax imposed by an international body. Instead, it is a coordinated framework that influences national tax laws. Under this system, if a multinational corporation's subsidiary in one jurisdiction pays an effective tax rate below 15%, other countries (typically the parent company's home country) can impose a "top-up tax" to bring that rate up to the minimum. This top-up tax reduces the advantage of operating in low-tax environments, thereby encouraging a fairer distribution of corporate income tax revenues globally. It also means that countries offering generous tax incentives might find their incentives less effective if the resulting low tax is simply offset by a top-up tax elsewhere.

Hypothetical Example

Consider "Global Corp," a multinational company headquartered in Country A, with a subsidiary, "Local Corp," operating in Country B. Country B has a statutory corporate income tax rate of 10%. Local Corp earns €100 million in taxable income in Country B.

1. Local Tax Paid: Local Corp pays 10% of its €100 million income to Country B as tax, which is €10 million.
2. Effective Tax Rate (ETR): Local Corp's ETR in Country B is 10% (€10 million tax / €100 million income).
3. Global Minimum Tax Check: Since the global minimum tax rate is 15%, Local Corp's 10% ETR is below the minimum.
4. Top-up Tax Calculation: The difference between the global minimum tax and Local Corp's ETR is 15% - 10% = 5%. This 5% is the "top-up tax rate."
5. Top-up Tax Imposition: Under the global minimum tax rules, Country A (Global Corp's home jurisdiction) can impose a top-up tax of 5% on Local Corp's €100 million income, resulting in an additional €5 million in tax.

This mechanism ensures that Global Corp, through its subsidiary, effectively pays a combined 15% tax on its profits generated in Country B, removing the incentive for Global Corp to artificially shift profits to Country B merely for tax advantages.

Practical Applications

The global minimum tax significantly impacts the strategies of multinational corporations and the tax policies of governments. For corporations, it necessitates a re-evaluation of their global tax planning, as traditional profit shifting strategies to low-tax jurisdictions become less effective. Companies must enhance their financial reporting capabilities to accurately calculate effective tax rates on a country-by-country basis, a complex undertaking that often requires new data analytics and systems. From a gover¹²nmental perspective, the global minimum tax is expected to increase global corporate income tax revenue. Estimates by the OECD and IMF suggest that Pillar Two could yield an additional $150–220 billion annually in global tax income. For example, s¹⁰, ¹¹tudies project that EU Member States could see an average increase of 7.1%, or EUR 26 billion annually, in corporate income tax revenues from the implementation of these rules. This framework⁹ also encourages countries to reconsider the design of their tax incentives, focusing less on headline rates and more on creating a favorable investment environment, as excessively low rates may simply be negated by top-up taxes elsewhere.

Limitation⁸s and Criticisms

Despite its aims, the global minimum tax faces several limitations and criticisms. One concern revolves around its potential impact on developing economies. Some critics argue that the framework, while increasing global tax revenue, may disproportionately benefit high-income countries where most multinational corporations are headquartered. Developing nat⁷ions, which might have historically relied on low corporate income tax rates and tax incentives to attract foreign direct investment, could see their competitive edge diminished.

Another point⁶ of contention is the complexity of implementation. The rules require extensive new calculations and data collection, posing significant compliance challenges for businesses and administrative burdens for tax authorities, particularly for those in less-resourced jurisdictions. There are also⁵ ongoing debates about specific carve-outs and exceptions within the rules, such as the substance-based income exclusion (SBIE), which allows a certain return on tangible assets and payroll to be exempt from the minimum tax, potentially reducing its revenue-generating impact. Political chal³, ⁴lenges, such as the initial stance of some G7 nations and the United States' domestic political disputes, have also posed risks to the deal's full adoption and effectiveness.

Global Mini²mum Tax vs. Corporate Tax Rate

The terms "global minimum tax" and "corporate tax rate" refer to distinct but related concepts in corporate finance. A corporate tax rate (often called the statutory tax rate) is the specific percentage of taxable profits levied by an individual country or jurisdiction on businesses operating within its borders. This rate is set by national law and can vary significantly from one country to another. For instance, a country might have a statutory corporate tax rate of 25%, meaning companies pay 25% of their declared profits in that country.

In contrast, the global minimum tax is not a national tax rate itself but an international framework designed to ensure that large multinational corporations pay at least a certain minimum effective tax rate (currently 15%) on their profits globally. If an MNC's operations in a particular country result in an effective tax rate below this 15% threshold due to local tax laws or tax incentives, then another country (usually the parent company's home country) can impose a "top-up tax" to reach the minimum. Therefore, while a country can maintain a low statutory corporate tax rate, the global minimum tax aims to prevent that low rate from being fully exploited for profit shifting, effectively setting a floor beneath the global tax burden for large entities.

FAQs

What is the primary goal of the global minimum tax?

The primary goal of the global minimum tax is to reduce tax competition among countries and deter large multinational corporations from shifting profits to low-tax jurisdictions to avoid paying their fair share of taxes.

Which companies are affected by the global minimum tax?

The global minimum tax rules primarily apply to large multinational corporations with consolidated group revenue exceeding EUR 750 million (approximately $820 million USD) annually. Smaller domestic businesses are generally not directly impacted.

How does t¹he global minimum tax relate to tax havens?

The global minimum tax significantly reduces the attractiveness of tax haven jurisdictions. If a company's profits are taxed below the 15% minimum in a tax haven, a "top-up tax" can be collected by other countries, eliminating the financial advantage of locating profits there.

Will the global minimum tax lead to higher prices for consumers?

The direct impact on consumer prices is complex and subject to debate in international finance. While some argue that increased corporate tax burdens could be passed on to consumers, the goal is to level the playing field and prevent tax avoidance, which might lead to more stable tax revenues for governments.

How is the effective tax rate for the global minimum tax calculated?

The effective tax rate for the global minimum tax (under the GloBE rules) is calculated on a jurisdictional basis. It involves dividing the covered taxes paid by a multinational group in a specific country by its qualifying income in that same country. This calculation is intricate and involves adjustments to align with the GloBE framework, often differing from traditional financial reporting standards.