A proposal for a Global Minimum Tax rate for MNCs is being considered by around 140 nations across the globe.
A proposal for a Global Minimum Tax rate for MNCs is being considered by around 140 nations across the globe.
The story so far: Around 140 countries are currently in talks to establish a Global Minimum Tax Rate for large, profitable Multi-National Corporations (MNCs.) This agreement would curtail the ability of corporations to reduce their tax burden by setting up headquarters or subsidiaries in countries that have lower or negligible tax rates. A 2023 deadline has been set for implementation.
On June 17, 2022, at a meeting of EU Finance Ministers in Luxembourg, Hungarian Finance Minister Mihaly Varga told his counterparts that his country would not be able to support the plans to reduce the levy due to strains on its economy from to the war in Ukraine.
Ireland and Luxembourg with negligible tax rates had been against this deal, as it would potentially remove their competitive advantage in terms of attracting large businesses. Ireland, for instance, has a corporate tax of 12.5 per cent, while the United States and other countries want a uniform minimum tax rate of 15 per cent. These countries now support the deal, after long negotiations led by the United States. The front in favour of the deal now faces challenges from other avenues.
Why are countries pushing for the global minimum tax?
As things stand, MNCs have the ability to set up subsidiaries or their headquarters in countries where corporate tax is low, thereby evading billions of dollars’ worth of taxes annually. As a result, countries like the US, where many of these companies originated, lose tax revenue.
Currently, the United States has a tax rate of 21 per cent, and it hopes that an increase in global tax rates to a minimum of 15 per cent would disincentivise MNCs from taking their business elsewhere. Under the proposed regime, the U.S. would be able to collect the tax that American MNCs don’t pay in countries with a sub-15 per cent tax rate. So, if an American MNC pays only 10 per cent tax in a different country, the U.S. would be able to claim the remaining 5 per cent.
European countries have ensured that the deal has two pillars. The first is the minimum tax of 15 per cent, and the second is a deal to ensure that MNCs are taxed in the countries where they operate, irrespective of whether they have a physical presence in the region. This is to ensure that MNCs which produce certain goods and services, such as digital services, pay tax in the countries where the service is offered and not just in their home country, which often is the U.S.
What are the roadblocks?
The deal, however, faces multiple roadblocks both in the international arena, as well as on the domestic front in some countries. Countries agreeing to the deal have to incorporate its provisions in domestic legislation, which may prove difficult for some.
In the U.S., the Republican Party has indicated that they will not support these plans, so getting measures passed would require the support of all 50 Democratic Senators — a difficult proposition. Additionally, there is a time crunch as well — the upcoming mid-term elections may tilt the balance of power in the Senate towards the Republicans.
Internationally, Poland was one of the countries presenting a challenge to the deal. Poland insisted that their competitively lower tax rate is what attracts foreign investment and that agreeing to this deal would be harmful to their economy. The deal requires Poland’s approval since the EU mandates that directives such as this need to be supported unanimously by all member nations. Poland wanted the minimum tax to be legally tied to the implementation of taxation in the region of operation, the second pillar of the deal. This would allow it to recoup some of the tax revenue it believes that it would lose post joining this agreement.
In the meeting held in Luxembourg on June 17, however, Poland rescinded their veto of the deal, only to see similar objections brought up by Hungary. Hungary, too, raised concerns about the delayed implementation of the other pillar of the deal, claiming that it was the combination of the two pillars which made the deal possible in the first place.
In the upcoming days, the deal may also face opposition from Lower- and Middle-Income Countries. A UN report claimed that the inability of these countries to attract investment through competitively lower taxes may adversely affect their income. Richer countries like the US and those of the EU may have to offer suitable accommodations and come to a common consensus and compromise if they wish for the deal to go through.
