Global minimum tax (GMT): An overview

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For years, governments have struggled to capture taxes from companies that have based themselves in countries that have lower tax rates, even when a large portion of their business is transacted in countries such as the United States or Canada. The Organization for Economic Co-operation and Development (OECD) has been working on creating a Global Minimum Tax (GMT). The GMT is aimed at profits, not revenue, and is designed to help mitigate the loopholes multi-national corporations are currently using to shelter profits from tax implications.

What is global minimum tax?

The global minimum tax (GMT) is an internationally agreed-upon minimum rate of taxes that would be paid by large corporations. The new GMT sets a proposed rate of 15% on profits. The OECD proposal has received the support of 137 countries and was approved at the October 2021 Summit in Rome with an effective date of 2024.

The primary reason MNCs have chosen to base themselves in one country or another is typically dependent on the existing corporate tax rate. Countries with lower tax rates, such as Ireland, have experienced an influx of corporations whose intent is to shelter their profits. The GMT is an internationally agreed-upon minimum that would be a “top-up” tax between the jurisdiction’s corporate tax rate and the GMT minimum. GMT works by setting a minimum rate of taxation for businesses that operate in multiple countries, as well as by introducing tighter rules on how companies can transfer their profits between countries to avoid taxation.

The GMT is based on a two-pillar approach. Pillar One focuses on where taxes will be paid, while Pillar Two focuses on how taxes will be paid through the GMT. Pillar Two focuses on three rules:

1. Income Inclusion Rule
2. Under Taxes Profit Rule
3. Subject to Tax Rule

The GMT is designed to reduce the incentive for businesses to shift profits to countries with lower tax rates, and to help ensure that all countries receive a fair share of the taxes paid by multinational companies. The OECD has argued that if implemented, GTM will provide governments with additional revenue for public services such as healthcare and education, while also increasing fairness in global taxation.

From a tax professional standpoint, the GMT presents numerous challenges in data collection and reporting. With over 10,000 businesses being affected, and numerous compliance challenges, tax professionals will need new tools to support their reporting.

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The importance of global minimum tax

Overall, the GMT set out to ensure greater fairness and equality in taxation. By reducing the incentive for companies to shift their profits to lower-tax jurisdictions, there can be a rebalancing of taxation inequalities. The OECD expects an extra $220 billion in tax income to be collected globally through the GMT. The intent is for the tax revenue collected by governments to go towards programs like healthcare and education.

Of the 136 countries currently supporting the GMT are: the United States, Canada, United Kingdom, Switzerland, Netherlands, The Bahamas, Saudi Arabia, France, Finland, Panama, Portugal, Russian Federation, Greece, Germany, and Luxembourg. Notable exclusions include Ireland, Estonia, Peru, Saint Vincent and the Grenadines, Sri Lanka, Nigeria, and Kenya.

The future of global minimum tax

The GMT is likely to incite a global reorganization of MNCs as they look for the most tax-efficient countries within which to house their revenue and profits. Governments with relatively low corporate income taxes may increase their domestic corporate income tax rate to reduce the GMT “top up” and offer other incentives defining new competitive values for companies and countries alike. Digital Services Taxes (DST) had started to appear before the OECD’s GMT initiative, and are tied to revenue, not profit, so there may be some adjustments on the DST as the GMT comes into effect. While there is no question the GMT is targeted at multinational corporations, as is often the case, smaller businesses, and organizations are likely to be more impacted by the GMT.

Because the GMT is going to touch many accounting and tax elements, including tax rules and reporting, tax professionals will face an enormous challenge in the coming months to help their clients meet compliance and organize their reporting. With an anticipated rollout in 2024, tax professionals will want to be proactive in developing a plan for addressing GMT in 2024 and beyond. Currently, 57% of tax department employees have stated they lack the resources they require to meet the GMT implementation.

The GMT is the first coordinated international effort to address the dynamic geo-political landscape for corporations. For years, the question of addressing global tax profits has plagued governments. The OECD has set into motion the first international initiative for global tax equality under its Base Erosion and Profit Sharing Initiative. For tax professionals, it is an opportunity to invest in their resources and tools to meet the needs of their international client base.