The election of US President Joe Biden has changed the international political landscape, increasing the momentum for a fundamental reshaping of international tax rules in the form of a global minimum corporate tax, which could be agreed as early as mid-2021.
A global corporate minimum tax is proposed in "Pillar Two" of the OECD's two-pronged workstream to overhaul the international tax system.
Pillar One involves the creation of new rules that would allocate some taxing rights to market jurisdictions, regardless of whether an enterprise doing business there has a physical presence in that jurisdiction. However, these proposals are controversial, and the US, under the Trump administration, previously opposed them on grounds that they would discriminate against successful US-based tech companies.
The new US administration has said it will no longer insist on the Pillar One reforms being optional and has returned to the negotiating table.
The proposals under Pillar Two seek to minimise the shifting of profits to low-tax jurisdictions by ensuring that income is subject to at least a minimum level of tax, wherever that may be.
In his domestic policies, Biden has already proposed a doubling of the existing US minimum tax on offshore intangible income under the "GILTI" tax regime, to 21%, as well as hiking the US corporate tax rate to 28%.
US Treasury Secretary Janet Yellen said in a speech on 5 April 2021, that a minimum tax should apply globally to prevent a "race to the bottom" on corporate tax and to substantially curb incentives for profit shifting. The US is understood to be eyeing a minimum corporate tax rate of 21%, which would be significantly higher than the 12.5% that countries were previously reportedly discussing.
How Does it Work?
How would this system work in practice? The new system would be similar in many respects to how controlled foreign company (CFC) regimes work. As with CFC regimes, income would be included in the tax base of a company based in a high-tax country if the income of a foreign connected entity is subject to tax at below the minimum corporate tax rate stipulated – in this case, that rate is to be agreed internationally.
In essence, it would allow countries to apply a "top-up" tax to profits shifted by companies to jurisdictions that impose a tax rate below the minimum. This would effectively nullify the benefits of shifting those profits for the company in question.
The US proposals have been backed by influential governments. For example, the French and German finance ministers expressed their support in a joint interview with the German newspaper Die Zeit last month. In fact, Germany's Olaf Scholz believes an international agreement can be reached by this summer. Further, the EU parliament voted overwhelmingly in favour of a resolution calling for a global minimum tax in April, with the resolution welcoming the US plans.
Impractical and Unrealistic?
Despite their popularity, these proposals are nonetheless complex and highly technical, meaning they could be hard to implement. And should an international agreement be reached, it is unclear what legal basis it would have, and whether an international instrument or treaty would be required.
The new framework could result in significant disputes and double taxation unless introduced harmoniously by all countries. There are still many uncertainties, not least about the scope of the minimum tax, with many carve-outs currently under discussion.