FourQ Intercompany Analysis: Impact of the G7 15% Minimum Global Tax Rate on Multinationals

Group of Seven (G7) finance ministers struck a historic deal establishing a global minimum tax rate of 15% for multinational companies. Tax and Intercompany financial management teams must take note.

News:

  • Governments around the globe looking to attract businesses to their shores have established increasingly lower corporate tax rates over the past 10 years.
  • Multinational companies looking to reduce their tax bills have allocated income, particularly from intangible sources such as patents, software, and intellectual property, to business units set up in “tax havens,” where tax rates have been particularly low or even nil. This allows companies to avoid paying higher taxes in their “home countries.”
  • Establishing this global minimum tax rate effectively eradicates this type of tax avoidance strategy by making it mandatory for countries to “top-up” the tax rates of subsidiaries in countries with tax rates below 15%.
  • Billed as a means of getting more tax revenue from multinationals, the decision effectively removes the incentive to “locate” in lower-tax jurisdictions, and effectively puts a floor under the ever-increasing rate reductions around the world – a practice that U.S. Secretary of the Treasury, Janet Yellen, and others recognize as a “race to the bottom.”
  • The agreement is anticipated to add a total of $50 to 80 billion USD in annual tax revenue across the globe.
  • The G7 communique did not address how digital services taxes will be treated, saying only that there should be “appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes.”
  • This agreement will next go to the G20 for approval.

Commentary:

  • The agreement demonstrates in no uncertain terms that this type of tax avoidance will be curbed.
  • In reality, much of the tax avoidance that this agreement purports to address has already been snuffed out by the anti-tax abuse developments established over the last decade. The most notable example being the G20/OECD initiative on base erosion and profit shifting (OECD, 2015), designed to limit the opportunities for multinational corporations to artificially shift profits.
  • Legitimate entities (i.e., not shell companies) operating in countries with lower-tax rates are caught out by this, which has triggered charges of “tax rate colonialism” by the powerful, industrialized nations of the G7.
  • The United States wanted digital services taxes scrapped as soon as a deal was in place. This will remain a contentious point within the G7, as the technology companies affected by this tax are unevenly distributed even within that small group of countries.

Intercompany Analysis:

  • How the details of this agreement will play out remains to be seen, but it is clear that conventional tax planning (i.e., maximizing taxable profit allocations to low tax environments) is increasingly out of phase.
  • As a result, tax authorities will increasingly refocus their audit efforts on the two sources that bring in most tax revenue relative to audits: indirect tax and transfer pricing.
  • This refocusing will include new regulatory requirements for automation with signs indicating that this will vastly increase over the next few years, especially with respect to indirect tax.
  • Multinationals should focus less on obtaining the optimal tax rate, and instead attend to avoiding and mitigating paying double tax and tax penalties. Centralization and automation are key to maintaining that governance.
June 20, 2021