The group of the 7 most developed countries (G7) and in particular the Finance Ministers of England, France, Switzerland, Italy, Japan, Germany, Canada and the USA recently reached an agreement to impose a minimum corporate tax of 15% worldwide. After several years and after many discussions, all these 130 countries finally agreed on changing the way that companies should be taxed worldwide. The new agreement introduces a new system of taxation with a minimum tax of 15% on large companies not on the basis of their registered office, but on the place where their activities are carried out.
The majority of this change will mainly affect large companies, with revenues in excess of EUR 20 billion and a pre-tax profit margin of at least 10%,as they will be asked to pay tax at 20% to 30% of their profits, more than the first 10% of their profit as a share of revenues. Of course it is at the discretion of each country individually whether this percentage will apply to all companies regardless of profit.
In short, this agreement allows a country with a higher tax rate to impose extra taxes on a company based there and which has not paid the minimum rate in another country where it has its actual activity.
Several countries have repeatedly refused to participate in the conference, saying that the US is pushing and trying to reassess the stalled talks that took place in early 2021 with new renewed proposals.
As mentioned above, the reluctance of three European countries is considered as an “embarrassment” as anything in the EU requires unanimity and the Commission does not know whether the three above-mentioned countries will veto it.
Regarding the change of seat, the low-tax countries that will be most affected are the countries that have several registered multinational companies e.g.. Ireland, Luxembourg, Estonia. According to research by Oxford Said Business School, 64% of companies are US-based businesses and 45% are technology-based companies.
The highly taxed developed countries that have the headquarters of many multinational companies on their territory will be the “winners” of the minimum tax, and these include, above all, the USA.
Some questions that have not yet been answered are when the global agreement will replace the local national tax systems and when it will become the full harmonisation of information exchange between countries.
Final decisions will be made by the G20 in October in Rome and each country will have to enact laws in its national legislation next year in order to start implementing them in 2023.
Despite all the talk of the new global legislation, our view is that most companies will continue to choose their country of headquarters on the basis of many other favourable factors besides taxation.
Moreover, it is obvious that America is in a hurry to implement the above legislation so that it can round up all the multinationals and tax them. Of course Mr. Biden needs to get congressional approval, and Republicans won’t give him a vote that easily.
In any case, our humble opinion is that we don’t believe all this will work properly so soon. The measures also, if implemented, will take at least another decade.
