Explained | The proposal for a Global Minimum Tax and the hurdles to its adoption

A proposal for a Global Minimum Tax rate for MNCs is being considered by around 140 nations across the globe.

The story so far: Around 140 countries are currently in talks to establish a Global Minimum Tax Rate for large, profitable Multi-National Corporations (MNCs.) This agreement would curtail the ability of corporations to reduce their tax burden by setting up headquarters or subsidiaries in countries that have lower or negligible tax rates. A 2023 deadline has been set for implementation.

On June 17, 2022, at a meeting of EU Finance Ministers in Luxembourg, Hungarian Finance Minister Mihaly Varga told his counterparts that his country would not be able to support the plans to reduce the levy due to strains on its economy from to the war in Ukraine.

Ireland and Luxembourg with negligible tax rates had been against this deal, as it would potentially remove their competitive advantage in terms of attracting large businesses. Ireland, for instance, has a corporate tax of 12.5 per cent, while the United States and other countries want a uniform minimum tax rate of 15 per cent. These countries now support the deal, after long negotiations led by the United States. The front in favour of the deal now faces challenges from other avenues.

Why are countries pushing for the global minimum tax?

As things stand, MNCs have the ability to set up subsidiaries or their headquarters in countries where corporate tax is low, thereby evading billions of dollars’ worth of taxes annually. As a result, countries like the US, where many of these companies originated, lose tax revenue.

Currently, the United States has a tax rate of 21 per cent, and it hopes that an increase in global tax rates to a minimum of 15 per cent would disincentivise MNCs from taking their business elsewhere. Under the proposed regime, the U.S. would be able to collect the tax that American MNCs don’t pay in countries with a sub-15 per cent tax rate. So, if an American MNC pays only 10 per cent tax in a different country, the U.S. would be able to claim the remaining 5 per cent.

European countries have ensured that the deal has two pillars. The first is the minimum tax of 15 per cent, and the second is a deal to ensure that MNCs are taxed in the countries where they operate, irrespective of whether they have a physical presence in the region. This is to ensure that MNCs which produce certain goods and services, such as digital services, pay tax in the countries where the service is offered and not just in their home country, which often is the U.S.