Global Minimum Tax Update
Published on by Michael O'Hara in International Business, Tax Services
In 2021, nearly 140 countries agreed to apply a minimum tax rate of 15%, updating decades-old rules on cross-border taxation. Introduced by the Organization for Economic Cooperation and Development (OECD), the new minimum tax rate is expected to generate an additional $220 billion in tax income globally.
On February 2, 2023, the OECD detailed the final guidance on how governments can incorporate the new global minimum corporate tax into their law books. Not all countries have the government infrastructure and resources to rewrite their tax laws, so this guidance is designed to clarify details so governments can adopt tax codes in a consistent manner with lower compliance costs.
In this new guidance, the OECD states participating countries should look at the way the United States has implemented the Global Intangible Low-Taxed Income (GILTI) approach to foreign income.
What is the reasoning for this?
This global restructure started in 2013 with the Base Erosion and Profit Shifting (BEPS) project, designed to stop multinational corporations from gaming the international tax system. This tightened the transfer pricing regulations among others. One of the main initiatives was to eliminate or reform tax incentives that only served to reduce income taxes while being disconnected from employment, tangible investment, or real ongoing activities.
Wherever tax incentives drive a corporation’s effective tax rate (ETR) in a jurisdiction below 15%, the corporation would potentially be subject to top-up taxes under the new Global Anti-Base Erosion (GloBE) Rules, a core component of Pillar Two that may have an impact on the effectiveness of certain tax incentives. Therefore, the design of tax incentives will require careful reconsideration in a post-Pillar Two environment.
What does this mean for the U.S. tax environment?
This global minimum tax rate helps protect U.S. workers as companies aren’t incentivized to move their companies to the lowest corporate tax rate country – meaning more companies will keep their operations in the United States.
How does this affect the current U.S. taxation structure?
Currently, the ETR for GILTI is 10.5% with the 50% deduction on GILTI income – below the 15% ETR requirement. Under the proposed Build Back Better framework in 2021, the Biden administration was limiting this 50% deduction to align with the OECD reform. Though this plan never came to fruition, as we get closer to the implementation date, U.S. multinational corporations need to be aware of this.
The OECD says this overhaul has the possibility of being implemented in the next year.
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