A global minimum tax model will reduce tax competition and put companies in a race for public subsidies.
The idea of a minimum corporate tax rate of 15% for multinational groups, floating around in international platforms since 2013, has been implemented from the beginning of this year. The Organisation for Economic Co-operation and Development (OECD) agreed on a new tax regime in 2021, followed a year later by the European Commission – all EU Member States have to transpose the minimum corporate tax model into their national law from 2024. They are joined by South Korea, Japan, Norway, Australia, Canada, Japan, Norway, Australia and the UK.
Countries that have long been known as “tax havens” – Ireland, Luxembourg, the Netherlands, Switzerland, and Barbados – are also joining in. The US, considered the world’s largest economy, has not yet made any decisions on actual implementation, despite the support for the project demonstrated by the administration of President Joe Biden. Similarly, China is in no hurry as well.
The global minimum corporate tax model foresees that multinational corporations with an annual turnover of €750 million and their subsidiaries with a turnover of at least €10 million and a profit of €1 million will have to pay a minimum corporate tax rate of at least 15%. According to the updated calculations, countries would add a total of USD 150 million to their budgets.
It is implemented through two pillars. The first pillar foresees that part of the profits of multinational companies will be taxed where they make sales. The second pillar introduces a minimum corporate tax. It will be implemented through three main rules. One of them encourages a country to introduce a minimum tax rate itself, while the other two rules ensure that if it does not, the revenue from the top-up tax will reach other countries. Those with parent and/or subsidiary companies.
The point is simple – this corporate tax model must encourage a country to either introduce a corporate top-up tax or ensure that the country’s effective corporate tax rate is at least 15%. Otherwise, the tax revenue will go to other jurisdictions. Such rules aim to prevent either the country or the company from benefiting from a lower corporate tax rate and to ensure that it is not worthwhile not to comply with the rules.
The necessity to apply the levy seems to be dictated by the numbers. For example, the 250 companies in the S&P 500 earn an average of €1 billion in pre-tax income, but 83 of them pay less than 15% corporate tax. These include digital technology companies such as Alphabet, Amazon, Intel, Netflix, telecom giant Verizon, and car manufacturers General Motors and Ford Motors. Depending on the country in which they are based, their corporate tax rate can be as low as 3% to 8%. Therefore, lawmakers expect them to return a larger share of their profits to national budgets once the global minimum tax model comes into force.
However, the breakthrough that the minimum corporate tax model will bring about will be much more significant than these figures. In other words, competition on tax rates will no longer make sense. Things that for years have promoted efficiency and economic growth attracted foreign direct investment and made governments more accountable. Knowing that tax cuts will add more to the budget than tax increases, countries have created a tax system attractive to businesses, motivating companies to locate in the country and maximize profits.
Replacing tax rate competition with tax harmonization encourages selective state intervention. If they can no longer compete on taxes, countries will turn to subsidies to attract foreign investment. Subsidies tend to favor specific industries, regions, and individual firms, distorting the market. Targeted subsidies create an opaque economic environment where success depends on preferential policy treatment rather than on the ability to offer the best goods or services at the most affordable price in the market.
Restricting the ability of countries to compete through corporate tax has happened before. A 1975 European Commission draft directive proposed a minimum rate of 45%. In 1992, a corporate tax rate of 30% was discussed. Both ideas never materialized because not all countries felt that limiting tax competition was in their interests.
And these are very simple. A neutral, predictable, and transparent tax system is in the best interest of businesses, consumers, countries, and the economy as a whole. Otherwise, there is no limit to public spending, taxpayers’ rights are undermined, and the burden on society is only increasing. No one can be sure what taxes will be introduced tomorrow.
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