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Global Minimum Tax

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Economics

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 global minimum tax is an agreement between 136 countries to impose a 15% tax on companies. The countries involved in the agreement account for more than 90% of the world’s economy.

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.

Google set up operations in Ireland as Ireland has a corporate tax of 12.5%. Although this is very profitable for Google, it is pretty costly for the US government.

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:

  • Reallocation of tax revenues. This is one of the most essential benefits of a global minimum tax. This is especially important for the home countries of the large companies as they lose a significant amount of tax revenues due to corporates shifting their profits to other low-tax countries. As a result, this would provide the government of a higher-tax country with much more revenue than they would otherwise. These revenues generated from a worldwide minimum tax would allow governments to increase their spending, resulting in more investment in developing their infrastructures, schools, healthcare, etc.
  • Individuals can pay fewer taxes. The global minimum tax also benefits individuals as they now could pay less in taxes. Governments would have additional revenues that could be used for their spending, allowing them to reduce tax burdens on citizens. Paying less in taxes would enable individuals to increase their consumption and enjoy higher incomes. The global minimum tax also reduces firms’ incentives to shift jobs abroad. Those jobs that would have been in other countries could now be opened in the home country.
  • Competition. A global minimum tax provides better competition for small businesses. Large companies have teams of prominent accountants and lawyers that help them increase profits by reducing their tax duties, something that small businesses don’t have. As a result, small businesses pay more taxes which shrinks their profit margins. To increase their profits, they would have to transfer parts of their taxes to prices paid by customers. As big corporations don’t have as many tax liabilities, they could lower the price— creating somewhat unfair price competition. However, due to the global minimum tax, large companies would end up paying more taxes and therefore competing much more fairly with small businesses.

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.

Global Minimum Tax - Key takeaways

  • Global minimum tax refers is an agreement between 136 countries to impose a 15% tax on companies.
  • Tax competition between countries results in loss of tax revenues for other countries that impose higher taxes.
  • The global minimum tax is designed to address the tax competition amongst countries.
  • One of the significant impacts of global minimum tax in an economy is providing governments with more tax revenues.
  • One of the most essential benefits of global minimum tax is enabling the reallocation of tax revenues.
  • An important benefit of global minimum tax is that it provides better competition opportunities for small businesses.

Global Minimum Tax

The global minimum tax is an agreement between 136 countries to impose a 15% tax on companies —the countries involved in the agreement account for more than 90% of the world’s economy.

It will work by imposing a minimum tax of 15% to all the countries in the agreement.

There are benefits to global minimum tax on economies as it would help increase government revenue and therefore enable governments to invest more in infrastructure, health care, and other projects. But it also has drawbacks. 

136 countries have agreed to have a global minimum tax.

A global minimum tax to be imposed on large companies around the world.

Final Global Minimum Tax Quiz

Question

What is the global minimum tax?

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Answer

An international agreement aimed to impose a 15% tax rate on large companies.

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What is the global minimum tax rate estimated to be?

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Answer

15%

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How many countries have joined the Global Minimum Tax agreement?

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136

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How much governments are estimated to gain as a result of this agreement?

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150+ billion dollars 

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Why a global minimum tax?

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Answer

Large companies are using low tax countries to shift their profits which results in loss of revenues for governments around the world.

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What is the main benefit of global minimum tax?

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Answer

It provides a fairer distribution of tax.

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Who proposed the global minimum tax agreement?

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Answer

The OECD- The Organization for Economic Cooperation and Development.

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Give an example of a company using low tax regimes to shift its profits.

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Answer

Google set up operations in Ireland as Ireland has a corporate tax of 12.5%. Although this is very profitable for Google, it is pretty costly for the US government.

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How does a global minimum tax provide more government funding for infrastructure and health care?

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Answer

The revenues generated from a worldwide minimum tax would allow the government to increase its spending, resulting in more investment in developing their infrastructures, schools, healthcare, etc.

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How do individuals benefit from the global minimum tax?

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Answer

The global minimum tax also benefits individuals as they now could pay less in taxes. Governments would have additional revenues that could be used for their spending, allowing them to reduce tax burdens on citizens. 

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What's the main disadvantage of global minimum tax?

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Answer

Developing countries don't have as much revenues as they did.

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Question

Mention five countries that have joined the global minimum tax agreement.

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Any five from: United States, United Kingdom, Canada, Germany, France, Spain, Norway, Greece, Italy, Greenland, Qatar, UAE, Oman, Australia, Albania, Turkey, India, Indonesia, Japan, Jamaica, etc.

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What would happen if the companies that have to pay more taxes now have an inelastic demand for their products?

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Answer

The consumers would end up paying more in prices to compensate for the portion of the tax large companies have to pay.

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What would happen if the companies that have to pay more taxes now have an elastic demand for their products?

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Answer

The tax would be shared between the large company and consumers. The prices wouldn't increase by as much.

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