A Two Pillar Act

Negotiations over the summer have finally come to fruition: The OECD has confirmed a staggering 136 countries have agreed to a minimum global corporate tax of 15%, reflecting more than 90% of world economies. Notably, countries previously cautious over the potentially adverse implications for their economics, least of all Ireland, Hungary and Estonia, have equally expressed their support for the agreement - Kenya, Nigeria, Pakistan and Sri Lanka have yet to do so. Whilst the overwhelming positive response to this news has made clear the desirability of a minimum tax, less clear has been what exactly this step means for economies and countries alike.

1.       What is the Global Corporate Minimum Tax?

First, the mechanics of the global corporate minimum tax ought to be understood. As the OECD articulates, Pillar One of the tax regime will reallocate over $125bn worth of profit to other market jurisdictions. This will result in developing countries gaining greater revenues than more advanced economies. Pillar Two itself is the one introducing the minimum corporate tax. This tax requirement is not however, equally applicable to all companies, rather a minimum revenue of €750m is required for its application. In terms of financial repercussions, this will result in the generation of $150bn to be added to worldwide tax revenues annually. These rules will take place in 2022, and finally be implemented by 2023.

2.       What Are the Implications of This Tax Deal?

Whilst an in-depth economic analysis of the advantages and disadvantages of the regime falls beyond the scope of this article, there are a few things worth noting. Firstly, and less obviously, the tax regime indicates a paradigm shift reflecting societal progression. As we move towards an increasingly globalised and digitalised world, a taxation system requiring some physical nexus to different countries is no longer a feasible regime. Rather, in adopting a functional approach, the operation, as opposed to the location of the business, takes precedence. This socially realistic model of taxation means money will be directed to where these companies actually do their businesses. As Biden further helpfully pointed out, this means countries are no longer set against each other and induces healthy atmosphere of cooperation, whilst ensuring tax is paid in the correct jurisdictions.

Second, the implications for tax competition have been hotly debated. Several countries in the preliminary stages of the negotiation, including Ireland, expressed concerns as to its compatibility with healthy jurisdictional variation. Far from eliminating competition however, the OECD has clarified the scheme merely sets ‘multilaterally agreed limitations’ across countries, thereby eliminating what is often characterised as a race to the bottom. The series of exceptions devised to ensure low taxes encourage investments and prevent disruption to existing taxation systems further indicates this point.

Thirdly, and negatively, whilst the taxation system is hailed as desirable for developing countries, this is not actually the case. Many developing countries have pointed out their dissatisfaction with the refusal for them to raise more taxes from companies, and they are limited to taxing small proportions of profits. The global economic advantage of taxation is thus not equivalent.

Fourthly, the global corporate tax was not agreed to in a vacuum. Interestingly enough, it came with a series of compensations from other bodies wishing to establish their own system. For instance, in the case of the European Union, the Digital Levy was initially proposed, however, due to the corporate tax, this resulted in its delays until autumn. Arguably, this indicates a global unwillingness for modernising regimes, also reflected in the caution of some countries to agree to the tax.

As such, the global corporate minimum tax, whilst constituting a welcome introduction, and certainly the first step in a more effective and digitalised model of taxation for the 21st century, is not entirely positive. The climate in which it was enacted means a series of compromises were necessary for its success, and its equal global advantage for both developing and advanced economies is less clear. Nonetheless, its rectification of the disparities between revenue and corporate taxation by companies means a free reign for unilateral conduct is no longer acceptable.