Updates on Global Tax Changes: What Does It Mean for Multinational Companies?

Negotiations for a global taxation change have been on the table since the 2008 economic crisis. Why? Because…

Negotiations for a global taxation change have been on the table since the 2008 economic crisis. Why? Because for several decades now, governments have struggled to charge a proportionate tax rate on global companies as they have been shifting profits around the world to avoid it.

Under current taxation systems across the globe, governments do not tax foreign-earned corporate income; only the government in which the income is generated does. That means companies can establish local branches in low-tax nations, declare profits there and pay the low-rate local tax even though their main profits come from sales elsewhere.

In order to stop this, the G7 countries (which comprises the US, Japan, Germany, the UK, France, Italy and Canada) have come together to strike a global taxation deal. There are two main pillars to this proposed deal:

Under the first pillar, countries would get a new right of taxation, a share of profits generated in their jurisdiction by an overseas-headquartered multinational. That would mean taxing the source of a company’s revenue, the income of its sales, regardless of the company’s geographical location. Consequently, companies would pay more tax in the countries they are making sales in, rather than countries they declare their profits.

Under the second pillar, a minimum corporation tax rate would be imposed by countries on the overseas profits of large companies headquartered in their jurisdiction. The rate, currently agreed to be 15%, would apply to multinational companies with revenues above a certain threshold; and the tax would be paid to the country where the parent of the multinational is located.

So, what does it all mean for multinational companies?

Well…

The focus is on “automated digital services” and “consumer-facing businesses”. So, the tech giants like Amazon and Facebook, oil giants like BP and Shell, telecoms companies and banks are among those likely to be affected.

It is reported that pillar one of the agreement would apply to global companies with at least a 10% profit margin. Twenty per cent of any profit above that would be reallocated and taxed in the countries where they operate. And the minimum tax rate under pillar two is said to capture up to 8,000 multinationals.

Although the details of the negotiations are yet to be clarified, the group of seven leading industrial economies already agreed on in principle to the global minimum corporation tax rate of 15%. However, some countries are resisting. Ireland’s finance minister rejects global tax plans and says they will keep their 12.5% rate, one of the lowest in the European Union. However, tax experts suggest all European countries could come to an agreement as 15% is not a big rise.

The UK corporation tax is already at 19%, and it is set to rise to 25% by 2023, well above the minimum rate agreed. So, one could think that the minimum corporation tax rate of 15% is relatively low. However, remember that it is the minimum, so it offers a path to get that percentage higher. But in what circumstances remains a question to be answered in the fine print of the negotiations.

Key details of the deal are due to be discussed by the wider Group of 20 countries next month.

Total
0
Shares
Leave a Reply

Your email address will not be published. Required fields are marked *

Related Posts
Read More

Digital yuan to beat Bitcoin?

Blockchains and cryptocurrencies have evolved from abstract inventions into one of the most popular methods of structuring finances. Now one of the biggest economies in the world, China, is unveiling its own digital currency.