The world of international tax is witnessing a historical moment, mainly characterised by the proposal to adopt a global minimum tax for multinational enterprises (MNEs). The OECD, in its attempt to fight international corporate tax avoidance, has proposed the adoption of a 15% tax on large multinational groups (global minimum tax). This measure has been approved, yet not adopted, by 137 countries in what the OECD called the “Inclusive Framework”.
The rationale of this coordinated effort lies in the attempt to contrast the use of low-tax jurisdictions and regulatory loopholes in the corporate structures of MNEs. These forms of tax planning were made easy by the immobile nature of intangible assets, finance and, where applicable, the digital nature of some businesses. Simultaneously, the attempt of countries to attract multinationals’ investments has led to a “race-to-the-bottom” of corporate tax rates, which have been declining in the last decades, perhaps below the optimal level.
The key feature of the global minimum tax is creating an incentive to tax. Despite some issues related to the mechanism, many countries have already adopted it, including the United Kingdom, Switzerland, South Korea and the European Union, which approved in December 2022 the Directive on the global minimum tax, which has to be transposed by Member States by the end of 2023. The US also adopted a form of minimum tax, although with a slightly different structure.
Functioning of the global minimum tax
The functioning of the global minimum tax has been published by the OECD (OECD 2021). The minimum tax has been designed to exclusively apply to MNEs with a consolidated financial income of at least € 750 million. The agreement reached by the Inclusive Framework is to levy an effective tax rate of at least 15%, although some countries believe this threshold is too low (Reuters).
To calculate the effective tax rate, it is necessary to divide the taxes paid by the company in the country (adjusted covered taxes) by the taxable income produced in the country (adjusted income). The adjusted covered taxes constitute, in brief, the relevant taxes paid by the corporation in the jurisdiction under examination. Much more controversial is the determination of the adjusted income, which is calculated according to specific criteria that are contained in the guidelines. The reason for this is that each country, despite some similarities, has a different way of calculating its corporate income relevant for tax purposes. Therefore, allowing countries to use their own notion of corporate tax income would permit an excessive level of discretion, undermining the efforts of the global minimum tax.
Hence, the OECD established a new mechanism to calculate the adjusted income, starting from the result in the financial statement of the company and applying some corrections to make it closer to a tax base. However, the use of accounting standards, which can also differ from country to country, still leaves some degree of discretion and creates some problems (Das, Rizzo 2022).
Once established the effective tax rate, if this is below 15%, the global minimum tax gets triggered. The country where the company is operating has the possibility to tax the complementary amount (excess profit), up to the effective level of 15%, to avoid leaving the taxing right to other countries.
If a country does not tax at the minimum level, the countries of residence of the parent companies will be able to tax this difference between what has been taxed and the effective 15% (Income Inclusion Rule, IIR). If all the countries of the controlling chain of the MNE do not apply the global minimum tax, then any country that has a subsidiary of the group can tax the excess profit (Undertaxed Payments Rule, UTPR).
These last two mechanisms only get triggered when countries do not tax at a sufficient level, creating a further taxing right over the excessive profit. However, they constitute the fundamental peculiarity of the structure of the global minimum tax, as they activate a positive incentive to tax multinational groups. From a strategic perspective, countries that do not tax multinationals at the minimum level will find themselves waiving their taxing rights, which will then be exercised by a different country. The more countries adopt the mechanism, the more the triggering of this process becomes certain, incentivising even more countries to adopt it.
The accurate design of the incentivising mechanism of the minimum tax might be the reason for its global success. However, there are some issues associated with the way the minimum tax works, which are being widely debated in legal scholarship.
First, the system is particularly complicated and is conceived as a package of rules that countries simply add to their pre-existing tax systems, whose complexity, in most cases, was already preponderant. The level of difficulty is increased by the interaction with the rules with the pre-existing national and international systems, which already comprise a large number of anti-tax-avoidance rules, including some that partly overlap in their way of collecting taxes from low-tax jurisdictions, like the Controlled Foreign Companies (CFC) regimes.
This level of complexity might be difficult to handle in some jurisdictions, especially least developed countries and jurisdictions with limited funds available to their tax administration, possibly leading to problematic scenarios. These countries might lack the expertise and the resources to audit the correct application of the global minimum tax mechanisms (Tomassini, De Rosa 2023). Additionally, these same countries seem to have a competitive disadvantage in the adoption of tax incentives, as the global minimum tax mechanisms incentivise the adoption of cashable credits, which, for similar administrative reasons, might be more difficult to adopt for these countries (Perry 2023).
As aforementioned, there are also problems related to the use of financial accounting to determine the adjusted income (Hanlon 2022). In brief, this process can create distortions in the companies’ financial statements, in an attempt to reduce their tax burden, especially in situations where the accounting system leaves discretion to the managers. It also gives the accounting principles standard-setting boards, generally recognised as independent bodies, some sort of taxing powers, which is, in most jurisdictions, contrary to the constitutional principles of taxation.
On a different note, it should be mentioned that the minimum tax does not curb tax competition but rather creates a new floor (Devereux, Vella, Wardell-Burrus 2022). The global minimum tax is certainly a step forward in the tax competition debate, as it attempts to raise the tax threshold, especially for countries that have low or no corporate taxation. However, after the application, countries will still be able to find ways to compete on their corporate tax levels, with cashable incentives, or in other ways, like providing other forms of subsidies or relieving some other regulatory burdens, like environmental regulation, financial regulation or other forms of labour/consumer protections.
Moreover, some additional problems may arise when multinationals and tax administrations will have to interact in the application of the law, which might give rise to national and international tax disputes. The stake is going to be quite high, considering the level of compliance required, the complexity of the rules and the dimensions of the corporations hit by the legislation, even for MNEs operating in countries that already tax more than 15%.
The international law perspective
The adoption of the global minimum tax reflects quite an unprecedented level of cooperation in the history of international tax and constitutes a strong signal in the international community, bearing a two-fold message. On the one hand, it shows countries’ willingness and shared effort to prevent tax avoidance in multinational companies. On the other hand, it demonstrates that even on a complex matter like direct taxation, typically the most indispensable national right, a large number of countries have shown an interest in pursuing harmony (Avi-Yonah, Kim 2022).
This latter point is going to have strong resonance in other debates that need coordination from countries to reduce the negative externalities that ordinary competitive conditions can generate, like what happens in environmental action. In this direction, the OECD is already preparing a new inclusive forum to discuss decarbonisation-related measures (Inclusive Forum on Carbon Mitigation Approaches).
Some of the mechanisms of the global minimum tax (such as the UTPR), as seen supra, allow the country of residence of any subsidiary, with no control relationship with the rest of the multinational group, to tax the profits of another company in the group, resident in a different country. This idea seems to go beyond the nexus that international law traditionally applies in the taxation of corporations, suggesting that countries might be willing to revolutionise the status quo to address certain international problems.
However, it must be noted that some critical perspectives arose concerning the actual level of inclusiveness of the Inclusive Framework (International Centre for Tax and Development). Therefore, for the upcoming projects it might be interesting to understand whether the decision-making arena can be improved to better identify and address problems that can occur in countries with fewer resources.
Amedeo Rizzo is a Doctor of Philosophy (DPhil) in Law student at Exeter College, University of Oxford