Proposals for a global lowest tax rate for MNCs are being considered by nearly 140 countries around the world.
Proposals for a global lowest tax rate for MNCs are being considered by nearly 140 countries around the world.
the story So Far: About 140 countries are currently negotiating to establish a global minimum tax rate for large, profitable multi-national corporations (MNCs). The agreement would reduce corporations’ ability to reduce their tax burden by establishing headquarters or subsidiaries in those countries. or negligible tax rates. A deadline of 2023 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 follow a plan to reduce the levy due to the strain on its economy from war to war. will not be able to support. Ukraine.
Ireland and Luxembourg, with negligible tax rates, were against the deal, as it would potentially remove their competitive advantage in terms of attracting larger businesses. For example, Ireland has a corporate tax of 12.5 percent, while the United States and other countries want a uniform minimum tax rate of 15 percent. After lengthy negotiations led by the United States, these countries now support the deal. The front is now facing challenges from other avenues in favor of the deal.
Why are countries pushing for a global minimum tax?
As things stand, multinationals have the potential to establish subsidiaries or their headquarters in countries where corporate taxes are low, leading to billions of dollars in tax evasion annually. As a result, countries such as the US, where many of these companies originated, lose tax revenue.
Currently, the tax rate in the United States is 21 percent, and it is hoped that a minimum 15 percent increase in global tax rates will discourage multinationals from taking their business elsewhere. Under the proposed arrangement, the US would be able to collect taxes that US multinationals do not pay in countries with a tax rate of less than 15 percent. Therefore, if a US multinational company pays only 10 percent tax in another country, the US would be able to claim the remaining 5 percent.
European countries have ensured that the deal has two pillars. The first is a minimum tax of 15 percent, and the second is a deal to ensure that multinationals are taxed in the countries where they operate, even if they have a physical presence in the region. This is to ensure that multinational companies that 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 is often US
What are the obstacles?
However, the deal is facing many hurdles in the international arena as well as on the domestic front in some countries. Countries that have agreed to the pact will have to incorporate its provisions into domestic law, which may prove difficult for some.
In the US, the Republican Party has indicated that they will not support these plans, so passing the measures would require the support of all 50 Democratic senators – a difficult proposition. Additionally, there is a timing constraint – the upcoming midterm elections could tilt the balance of power in the Senate towards Republicans.
Internationally, Poland was one of the countries to challenge the deal. Poland insisted that their competitively low tax rate attracts foreign investment and that agreeing to the deal would be detrimental to their economy. The deal requires Poland’s approval because the EU mandate states that such directives need to be unanimously endorsed by all member states. Poland wanted the minimum tax to be legally linked to the implementation of taxation in the area of operation, which is the second pillar of the deal. This would allow it to recover some of the tax revenue it believes will be lost once the agreement is entered into.
At a meeting in Luxembourg on 17 June, Poland revoked its veto of the deal, only to see similar objections brought by Hungary. Hungary, too, expressed concerns about delays in the implementation of the second pillar of the deal, claiming that it was the combination of the two pillars that made the deal possible in the first place.
The deal may also face opposition from low- and middle-income countries in the coming days. a United Nations report claimed that the inability of these countries to attract investment through competitively lower taxes could adversely affect their income. Wealthy countries such as the US and the European Union may have to offer suitable housing and reach a consensus and agreement if they want to go ahead with the deal.