Global Minimum Tax

Have you ever thought about what a global minimum tax would look like? What are some of its impacts on economies, and most importantly, how will it impact you? The global minimum tax is an agreement signed by over 100 countries to impose a minimum tax of 15% to large companies in every country that’s part of the agreement. This will have a significant impact on economies all over the world, all of which you’ll learn in this article.

What is the global minimum tax?

The proposal for the global minimum tax began with the Organisation for Economic Co-operation and Development (OECD). So far, 136 countries have joined the agreement to impose a minimum tax of 15% on large companies. The agreement will be set in motion in 2023.

The OECD estimates that the tax will contribute to more than $150 million in tax revenue worldwide. There are specific requirements that companies have to meet to pay this tax. However, this will have an impact on economies worldwide.

The agreement’s primary goal is to tackle large companies’ tax-evasion practices. The competition based on tax rates between countries has provided great opportunities for companies to expand their profits. Many companies use loopholes in regulations to avoid paying taxes which often causes a lot of money for governments. To work and be global, each country has to sign the agreement and enact the rules and regulations the agreement comes with.

Why a global minimum tax?

There is increasing tax competition between countries throughout the world. Certain countries reduce their tax rate to attract foreign direct investment, significantly contributing to their economic development.

Although this is especially true for developing economies, countries with advanced economies also apply low-tax models to attract big corporations. This competition between countries results in loss of tax revenues for other countries that impose higher taxes. This then results in a substantial loss for the government, and it could reach a point where it becomes unsustainable.

Big corporations use this tax competition between countries to their advantage through various methods. One of the most common ways to avoid tax in their home country is by allocating their patent or trademark rights (intangible property) to a subsidiary company located in another country. This way, the income received from their patents or trademark is taxed at lower rates.

The global minimum tax is designed to address tax competition amongst countries. Having a minimum corporate tax rate across the world would remove the incentive of firms to use other countries to escape paying taxes. Governments of countries that have higher taxes could see their tax revenue increase. From a global perspective, this would enable a better distribution of tax revenue.

The pros and cons of a global minimum tax

Like many economic policies, there are many pros and cons. The global minimum tax is no exception.

Pros

Some pros of a global minimum tax are:

Cons

Some cons of a global minimum tax are:

• Developing countries lose out. Many developing countries have gained a lot by offering low taxes to large companies. The global minimum tax will reduce the foreign direct investment into such countries. Additionally, there will be fewer jobs for these countries as the global minimum tax would reduce incentives for shifting jobs abroad.
• Questionable effectiveness. Countries will try and do whatever they can to ensure that foreign direct investment keeps flowing in their economies. That’s one of the main ways these countries can grow and develop. As a result, the tax incentive for multinational companies to shift profits will likely be there even with a global minimum tax. The tax rate is going to be a minimum of 15%, but this doesn’t mean that the tax rate will not vary from country to country. The good part is that the profits made by multinationals will be reduced at least by 15%, and as such, incentives are reduced.

Which countries have agreed to the global minimum tax?

The total number of countries that have joined the agreement is around 136. Countries part of the global minimum tax agreement include the United States, United Kingdom, Canada, Germany, France, Spain, Norway, Greece, Italy, Greenland, Qatar, UAE, Oman, Australia, Albania, Turkey, India, Indonesia, Japan, and Jamaica.

The impact of a global minimum tax on the economy

One of the significant impacts of global minimum tax in an economy is that it provides governments with more tax revenues. This holds especially true for the governments in higher-tax rates countries that have been subject to tax evasions. The increase in tax revenues could lead to governments spending more on infrastructure, healthcare, schools, etc. The increase in government spending would help create more jobs and lead to more output in the overall economy. As we mentioned before, the OECD claims that the agreement will add $150 million in tax revenues annually.

Many economies may experience inflation. A combination of higher taxes and higher government spending is a perfect recipe for inflation, although it might not be severe.

There is a wider implication a global minimum tax could have on a country’s economy. For instance, some countries require large companies to pay a relatively small percentage for their taxes. Keep in mind that these companies offer goods and services to citizens of these countries through which they make profits. What do you think would happen when a large company ends up paying double the amount of tax it used to pay?

To make up for the money, they spend on paying taxes, the companies will have to charge higher prices. The degree to which customers pay this percentage of the price depends on whether the good has an elastic or inelastic demand curve. If the demand curve for the goods and services of these companies is elastic, then a price increase would cause a great fall in demand. As a result, companies will have to pay parts of the tax themselves rather than translate it into higher prices. However, if the demand is inelastic— a higher price leads to a relatively small demand for the product, the companies could bill the entire 15% tax to their customers, keeping their profits intact.