In 2022, tax authorities around the world hope to finalize the myriad details that will shape a Global Minimum Tax on multinational corporations — if they can reach consensus and make it happen.
Reuters noted that this is “an extremely tight timeframe given that previous international tax deals took years to implement.”
The Global Minimum Tax is the latest initiative spinning off of the Base Erosion and Profit Shifting (BEPS) initiative from the Organisation for Economic Co-operation and Development (OECD). Earlier efforts have given taxing bodies greater visibility into corporate tax planning and business activities, increased the systematic sharing of taxpayer information between countries, and spurred near real-time financial reporting requirements and other reforms to rein in tax avoidance.
In the case of the Global Minimum Tax, the goals are to eliminate low-tax jurisdictions and ensure corporate income is taxed in countries where companies generate revenue but don’t have a physical presence.
In a recent report for Checkpoint, Robert Rizzi, a tax partner with Steptoe & Johnson LLP in Washington and New York, noted that U.S. Treasury Secretary Janet Yellen has said proponents of a Global Minimum Tax aim “to avert a ‘race to the bottom’ in which countries reduce their tax rates to encourage foreign investment (and) create a more favorable business environment compared with their neighbors, driving global tax rates, and revenue, ever lower as they compete with each other.”
In October, the OECD announced that 136 countries representing more than 90% of the global economy had agreed to an outline for new tax rules that would ensure major corporations pay a minimum tax rate of 15%. Under the deal, “large companies would pay more taxes in countries where they have customers and a bit less in countries where their headquarters, employees, and operations are,” the Tax Foundation explained.
The proposal features two pillars, both of which include multiple elements.
Pillar 2 includes the global minimum tax, which would apply to companies with more than €750 million in revenues. Pillar 1 would potentially change where multinational enterprises pay taxes. It features Amount A which would apply to companies with more than €20 billion in revenues and profit margins surpassing 10%. “For those companies, a portion of their profits would be taxed in jurisdictions where they have sales; 25% of profits above a 10% profit margin may be taxed,” the Tax Foundation reported.
Making this happen across 130-plus nations, of course, is no small task. “Both Pillar 1 and Pillar 2 represent major changes to international tax rules, and the outline suggests that the changes should be put in place by 2023,” the Tax Foundation reported. “Countries would have to write new laws, adopt new tax treaty language, and repeal some policies that conflict with the new rules.”
International tax experts from KPMG, Orbitax, and Thomson Reuters noted this aggressive timetable during a recent webinar exploring the details of the Global Minimum Tax framework.
The OECD’s goal is to implement the Global Minimum Tax in 2023, said Kimberly Tan Majure, Principal in KPMG’s Washington National Tax Office.
“The thought is to finalize the agreement and start getting to resolution with respect to the technical details,” she explained. “There’s got to be model legislation and multilateral instruments — so people can focus in on what exactly we’re agreeing to. Then they need to develop guidance, which will probably have to crystallize over time. More issues will come out as we start implementing and people realize we’ve got a problem here, we’ve got a gap there. There will be several iterations. But 2022 will be the time in which they get the bulk of that crystallized and rolled out.”
All of this, of course, is subject to each country’s political climate and legislative agenda. “Even if there is consensus and agreement with respect to the guidelines, the guidance, the templates, the forms,” Majure explained, “when it comes down to actual implementation, different countries are on different timings. They have different legislative packages. They have different legislative processes to get through.”
Advocacy and lobbying at the national level will likely impact local implementation. “We can agree on a high level,” Majure said. “But we’re going to get, as a practical matter, variation in terms of timing and local rules. The bottom line, I think, is that it’s going to be an interesting few years.”
Bianca Kuijper, Director of Direct Tax & Transfer Pricing Propositions at Thomson Reuters, noted the challenges that this extensive regulatory transformation will present to corporate tax departments. “This international alignment on corporate taxation will come with unprecedented global transparency and reporting requirements,” she said. “It will have impact across multiple jurisdictions, increase the number of tax returns they need to file, and may require additional disclosures in some countries. Careful, consistent, coordinated reporting will be needed across enterprises. Tax leaders need to diligently prepare their department for these changes.”
Gratian Joseph, CEO of Orbitax, the international tax technology company, described steps corporate tax departments can take now to prepare for what’s to come.
“Companies should look at which of these rules are probably going to impact them right now, and do some basic modeling to identify what the hotspots are,” he said. “By doing that they may be able to see what data-gathering requirements they might eventually have to put in place and revisit which of these workflows they may already have in place. If they’re not currently following best practices try to improve that so the amount of work that will have to be put in place when these rules become effective will be minimized.”