What is a Global Minimum Tax Rate?

In today's Finshots we talk about global minimum tax rates and why the US is seemingly pushing for it.

The Story

Multinational corporations don’t like to pay their fair share of taxes. They’ll do everything in their power to exploit loopholes and minimize their tax liability. Most companies simply open offices in places like Ireland and the Cayman Islands — destinations where tax rates are low or negligible. And at the end of it all, they’ll have done just enough to avoid paying billions of dollars in taxes. [Check Double Irish Dutch Sandwich]

And the US government is sick of it.

They know this is a race to the bottom. Because countries like Ireland and Luxembourg have been doing this for ages. They have been enticing major corporations by offering them deals they can’t refuse — low corporate tax rates and a business-friendly environment. And as companies began setting up subsidiaries and shifting their corporate headquarters, the US lost a ton in tax revenue.

Even worse, they’ve been forced to reduce their own tax rates in a bid to be more competitive. And it’s happening everywhere. In 1980, the average global corporate tax rate stood at about 40%. As of 2020, however, it’s languishing at 24%. Give it a couple more decades, maybe the global tax rates will drop even further. It had to stop.

Especially when you consider the fact that the Biden administration is planning to spend $2 trillion in propping up the US economy. They’ll need the money and taxation is probably the easiest way to mobilize resources. So the US government forwarded a very brave proposal a couple of months ago —A global minimum tax rate of 21%. They revised it to 15% recently, but the premise is still the same.

They will simply begin taxing all overseas income at this new rate and eliminate loopholes that allow companies to shift profits to tax havens. Meaning, if you’re a US company trying to book your profits in Ireland (that boasts a lower tax rate of 12.5%), then the US will simply walk in and collect the extra 2.5% on your overseas income — Thereby making sure that you’re paying at least 15% in taxes regardless of where your sales are made. This would definitely help boost the government’s finances.

But note that this isn’t called a US minimum tax rate. It’s called a global minimum tax rate. Because the US wants a consensus and they want everybody to impose this rule.

Why? you ask.

Well, if it were just the US imposing such a rule, then companies originating out of Germany, France, the UK, and other countries would have a substantial edge. They’d be allowed to create subsidiaries and operate out of tax havens with no implications. This would put them at a distinct monetary advantage when competing with other MNCs from the US. However, if everybody was imposing the global minimum tax rate, then such an advantage wouldn’t exist in the first place. And for countries that have already lost billions in tax revenue, a global minimum tax rate of 15% wouldn’t seem like such a bad idea.

But they know it’s the US pushing for this initiative. So they think they can get some extra leverage here. One thing that’s bothering a lot of European countries (including India) is how digital companies operate in foreign jurisdictions — Think companies like Netflix and Facebook. These US companies can sell their services to people in India without ever paying a single penny in taxes simply because they don’t have a presence here. And while we have tried to hit back by imposing a “digital tax” of sorts, there’s no clarity on how to deal with this problem entirely. Of course, the US doesn’t want to do anything with this because most new-age tech companies are based out of the US and they’re actually gaining from this whole exercise. But it’s a good time for other countries to use the global minimum corporate tax as a bargaining chip.

So yeah, the US is looking to radically transform global tax laws and now you know why.

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