A Tax Revolution: incorporation of minimum 15% corporate tax

October 16, 2021

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2 min read

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What's going on here?

136 countries agreed to impose a minimum corporate tax of 15% by 2023, which will affect companies with global sales above 20 billion euros and profit margins above 10%.

What does this mean?

The deal will ensure that multinational companies pay taxes in countries where they operate. Countries will now have more scope to tax major companies operating within their borders, even if they do not have a physical presence there. This has come following concerns that large companies have been re-directing their profits through low tax jurisdictions. Ireland has been at the forefront of this, offering a 12.5% tax rate for businesses with a turnover of more than £636m and resultantly attracting large foreign investment. An increase in corporate tax means countries like Ireland will no longer stay an attractive destination for investors since they will offer nothing different. This tactic will allow States to limit, and hopefully end, the ‘race to the bottom’ on corporate taxation.

The French Finance Minister, Bruno Le Maire, called this a tax revolution. The minimum corporate tax will allow for a fairer tax system, creating more justice in terms of taxation. Additionally, the implementation will significantly bolster the economy on its journey to recovery from the pandemic, with an expected extra cash flow of £108bn of tax a year.

What's the big picture effect?

This is a significant milestone since it will be “the first fundamental change to the system of cross-border corporate taxation in a century”, noted the FT. The new system will ensure minimal profit shifting meaning that competition between nations to offer more attractive deals to large companies will be limited. When this happens, law firms will be at the forefront of providing essential services to multinational companies affected the most by the minimum corporate tax. Clients will seek advice about how to re-evaluate their business decisions to ensure they are tax-efficient and commercially beneficial at the same time.

Certain countries have negotiated different terms for the agreement. For example, China has added a clause that will limit the effect of the global minimum tax for companies that are starting to expand internationally. Whereas, in Estonia, the minimum tax will only apply to subsidiaries of large international groups. Therefore, we can expect the first couple of years to be uncertain, with many companies needing to consult law firms about how the new minimum tax law will affect their business when they want to expand abroad. 

On the other hand, there has also been some reluctance from developing countries like Kenya and Nigeria who find the new tax approach mainly benefitting larger economies and leaving the smaller countries with loss of revenue they would have otherwise made from large company profits. That is because once developing countries adopt the minimum corporate tax of 15%, they will no longer provide an attractive playing field for large companies to invest in. It will be thus interesting to see whether the remaining four countries – Nigeria, Kenya, Sri Lanka and Pakistan – will agree to the deal. Negotiations have taken place to include features that will alleviate concerns expressed by these developing countries.

Report written by Dominika Gaber

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