Global minimum tax:
Shaping the future of corporate taxation


01 Mar, 2024

The concept of a global minimum tax has gained momentum as a response to the challenges posed by the digitalization and globalization of the economy. The goal is to ensure that multinational corporations contribute a fair share of taxes, regardless of the jurisdiction in which they operate. As of October 2021, 136 countries agreed to implement a 15% global minimum tax rate, with discussions ongoing and implementation set to begin in 2023.

Inclusive Framework and Participants: Over 140 countries, including major economies like the United States, China, and several European nations, have joined the Organization for Economic Co-operation and Development (OECD)/G20 Inclusive Framework. The framework aims to address base erosion and profit shifting (BEPS) and sets the stage for the implementation of the global minimum tax.

Objectives and Beneficiaries: The primary beneficiaries of a global minimum tax are countries facing erosion of their tax base due to profit shifting by multinational corporations. By establishing a minimum tax rate, countries seek to prevent a “race to the bottom” in corporate tax rates, fostering fair and equitable distribution of tax revenues.

Implementation and Criteria: The global minimum tax rate targets multinational firms with a global revenue of €750 million ($868 million) or more. While governments retain the authority to set local corporate tax rates, a “top-up” provision is introduced. If companies pay lower rates in a particular country, their home governments may impose additional taxes to meet the 15% minimum, eliminating the advantage of profit shifting.

Two-Pillar System: The global minimum tax operates on a two-pillar system, each addressing specific challenges in the current corporate taxation landscape.

  1. Pillar One (Reallocation of Profits):
    • Targets the largest and most profitable multinational corporations.
    • Allocates excess profits to jurisdictions based on consumer or user location.
    • Aims for a fairer distribution of profits and taxing rights among countries.
  2. Pillar Two (15% Global Minimum Corporate Tax):
    • Introduces a 15% global minimum corporate tax for eligible multinational groups.
    • Addresses low-taxed income in subsidiaries, ensuring a minimum effective tax rate.
    • Comprises rules such as Income Inclusion Rule (IIR), Undertaxed Payments Rule (UTPR), and Subject to Tax Rule (STTR).

Reasons for Implementation: The global minimum tax is a response to outdated international tax rules and the challenges posed by digitalization. Profit shifting to low-tax jurisdictions and a “race to the bottom” in corporate tax rates have resulted in revenue losses for higher-tax countries, jeopardizing essential government functions.

Impact on Low Corporate Income Tax Countries: Countries with corporate income tax (CIT) rates lower than 15% face decisions regarding the global minimum tax:

  • May lose taxing rights if they do not implement the agreement.
  • Options include raising CIT, creating divided tax policies, or maintaining the status quo.
  • Tax havens may lose their appeal, as reduced or zero tax rates become less incentivized.

In conclusion, the global minimum tax represents a significant step toward addressing challenges in international taxation. As countries move towards implementation, ongoing discussions and negotiations will shape the final framework. The agreement aims to create a fairer and more sustainable global tax system, discouraging profit shifting and ensuring that multinational corporations contribute their fair share to the economies in which they operate.