Uncertain Plans for a New Global Minimum Tax Are Weighing on Business
Multinational companies are navigating a fog of uncertainty, facing trade wars, ruined supply chains, and a dramatic rise in geopolitical uncertainty. On top of that, authorities are doubling down on a mission to tighten the screws on businesses with a new “global minimum tax.”
Policy makers can’t fix all the world’s problems tomorrow, but they can lift at least one layer of fog by putting a pause on dense new policies and clearing up the already-messy international tax landscape instead.
How did we get here?
Complexity and uncertainty have ballooned since the 2017 U.S. tax reform normalized minimum taxes through a policy called GILTI. Short for “global intangible low-taxed income,” the policy was intended to work as a minimum tax on U.S. multinationals’ foreign earnings. With the U.S. imposing a minimum tax on its own multinationals, other countries quickly decided they wanted a slice of the pie, too. Unintentionally, GILTI became step one in paving the way for a global minimum tax on the world stage.
Once the U.S. had an operational policy, other countries in the Paris-based Organization for Economic Cooperation and Development were swift to suggest a unified approach for ensuring a minimum level of taxation for business profits wherever they are earned in the world. This became known as the “global minimum tax.” The U.S. was happy to oblige, as long as existing U.S. rules could coexist with a global solution.
Now, governments across the world are ready to put new rules into place. But what started as a politically expedient solution has been tricky to put into practice. Converting the global minimum tax idea into workable policy to be grafted onto dozens of different tax codes has proven challenging to say the least.
Setting the minimum tax rate at 15% was simple enough; agreeing on the tax base to which it applies has been much harder.
Proposed rules apply the 15% rate to a wholly new tax base—one that has not been tested and requires numerous data points and legal concepts that are not currently part of many tax codes.
The policy challenge of multinational companies paying low rates of tax by legally avoiding taxes has several possible solutions, some of which are much more efficient (and less complex) than the global minimum tax. But governments dissatisfied with the outcomes of tax competition chose not to wrestle with defining what a good or bad tax incentive might be. Is a tax holiday for a mining company any better (or worse?) than a reduced rate for income from patents or a generous super-deduction for research and development costs?
Rather than determining which policies were superior or inferior, countries chose to overlay a minimum tax where any incentives could be clawed back through a top-up tax if that company has an effective tax rate below 15% within a jurisdiction.
This political solution has now grown into a technical problem both for taxpayers and lawmakers. The OECD, an entity without democratic legislative authority, has drafted rules that duly elected members of governments will need to vote on and transpose into domestic law. Within the European Union, where unanimous agreement on the minimum tax has not been reached, unilateral adoption of the rules by a handful of countries would create new legal uncertainties.
Deviations along the way may lead to mismatches not just within the EU, but across the world.
Implementation, administration, and compliance for this minimum tax are all yet to come. Companies are rightfully concerned that they do not have enough guidance to file and pay taxes under the proposed rules.
Achieving certainty would require more coordination, policy consistency, and administrative simplicity across jurisdictions. Without these, chaos could ensue as companies are stuck trying to comply with different legal applications of rules on different timelines while monitoring other rapidly evolving tax policy proposals.
A company making a cross-border investment decision today cannot know how quickly the new rules will be put in place or in how many jurisdictions, and whether its investment will be taxed too low (relative to the rules) or which tax authorities it might be liable to when a top-up is levied.
Add to that the challenge of myriad post-pandemic and wartime tax policies and economic headwinds and it becomes clear: If policy makers care about our global economy, policy certainty should be their guiding light.