Impact of "Global Minimum Corporate Tax Rate"

The "minimum corporate tax rate scheme " is an effective way to prevent enterprises’ transferring profits to tax havens as well as a powerful weapon to combat tax havens.

More and more governments begin to use the minimum tax rate as a means to protect the tax base, especially in developing countries with weak tax management which are confronted with major challenges in effectively taxing large multinational companies.

IMF uses a new database of global minimum corporate tax schemes to show how minimum taxes have become increasingly popular over the past few decades. In the countries where the statutory corporate tax rate (the tax rate prescribed by law) is high, the minimum tax rate based on turnover is the most common one and in the countries where the minimum tax is levied, the proportion of corporate tax revenue to GDP is also high. IMF researches the impact of minimum tax on income and economic activities through the combination of data at the national and corporate levels. It is found that the introduction of the minimum tax rate can increase the average effective tax rate (the tax rate actually paid by enterprises with the tax exemption taken into consideration). Specifically, the minimum tax rate based on the enterprise income after the reform can maximize the effective tax rate, followed by the minimum tax rate based on assets and turnover. In addition, from the company-level data, the introduction of the minimum tax of 0.5% of turnover of and of 1% of total assets will bring about potential revenue. The former can increase the government's tax revenue by 7% and the latter by nearly one third. These results show that the "minimum corporate tax scheme" has great potential in expanding tax revenue.

The agreement reached by the G7 countries on minimum tax rate has given new impetus to the reform of international tax rules led by international organizations. As part of this reform, OECD and G20 proposed a global minimum corporate tax rate on the profits of multinational companies at the end of 2020.

Countries will still set their own local tax rates, but if a multinational company pays less than the global minimum tax rate in another country, its home country or jurisdiction of origin could supplement tax obligation to ensure that it would pay the minimum tax. In this way, the problem of profit shifting to low-tax jurisdictions will be reduced.

The global proposal from OECD and G20 differs from the standard local minimum tax—it doesn’t focus solely on the income generated by activities within a country. On the contrary, supplemental tax will only be triggered when other countries impose insufficient taxes on multinational companies.

In addition, the “global minimum corporate tax rate scheme” also avoids a more radical method of reshaping international tax rules. Compared with the global minimum tax rate, other schemes to solve the tax problems arising from digital economy or the leftover problem of base erosion and profit shifting extend the concept of permanent establishments and make certain breakthroughs in the current international taxation framework. What’s more, they question the “arm’s length principle”, which is fundamental in international tax rules. However, the “global minimum corporate tax rate scheme” provides a simpler alternative to the complex rules of the global minimum tax proposal, which makes a few changes to the existing rules and faces very limited legal obstacles. If set properly, the scheme can be implemented relatively easily, and can even be used as a transitional measure to a deeper reform of international tax rules.

The “global minimum corporate tax rate” scheme sets the lower limit for international tax competition. For governments, the scheme will reduce the pressure of tax competition among countries, so that they don’t have to blindly reduce the corporate income tax rates in competition with tax havens. For companies, due to the existence of the minimum tax rate, even if they transfer business activities or profits to tax havens or some jurisdictions where the effective tax rate is lower than the minimum, they still can’t benefit from it. Therefore, companies will be less affected by the motivation of tax, and the allocation of their global structure may be more reasonable.

For tax havens, it’s no longer beneficial to set the effective tax rate below the minimum. They have to look for other competitive advantages such as more professional financial services in order to create an environment conducive to attracting profits and investment. As tax havens gradually raise tax rates, high-tax countries such as Germany and France will collect less extra tax through the “global minimum corporate tax rate”, but this will create a fairer and better international tax environment in return.