Global minimum tax: Making tax havens less attractive

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  Quantumrun Foresight
• November 29, 2023

Insight summary

The OECD's GloBE initiative sets a global minimum corporate tax of 15% to curb tax avoidance by multinationals, impacting firms with revenues over USD $761 million and potentially raising USD $150 billion annually. Both high and low-tax jurisdictions, including Ireland and Hungary, have endorsed the reform, which also restructures where taxes are paid based on client locations. This move, supported by President Biden, aims to discourage profit shifting to tax havens—a common tactic of tech giants—and could lead to increased corporate tax department activity, lobbying against the reform, and shifts in global corporate operations.

Global minimum tax context

In April 2022, the intergovernmental group Organisation for Economic Co-operation and Development (OECD) released a global minimum corporate tax policy or Global Anti-Base Erosion (GloBE). The new measure aims to combat tax avoidance by large multinational corporations (MNCs). The tax will apply to MNCs that earn more than USD $761 million and is estimated to bring in around USD $150 billion in additional yearly global tax revenues. This policy outlines a specific framework to address the tax issues resulting from digitalization and globalization of the economy, which was agreed upon by 137 nations and jurisdictions under the OECD/G20 in October 2021.

There are two “pillars” of the reform: Pillar 1 alters where large corporations pay taxes (impacting profits worth about USD $125 billion), and Pillar 2 is the worldwide minimum tax. Under GloBE, large businesses would pay more taxes in countries where they have clientele and a bit less in jurisdictions where their headquarters, employees, and operations are located. In addition, the agreement establishes the adoption of a worldwide minimum tax of 15 percent that would apply to firms with earnings in low-tax nations. The GloBE rules will impose a “top-up tax” on an MNC’s “low-taxed income,” which is profits generated in jurisdictions with effective tax rates below 15 percent. Governments are now developing implementation plans through their local regulations. 

Disruptive impact

In July 2021, US President Joe Biden led the call to implement the 15 percent global minimum tax. Putting a floor under multinationals’ tax obligations in other nations would assist the President in achieving his goal of raising the local corporate rate to 28 percent by reducing the incentive for businesses to keep moving hundreds of billions of dollars in earnings to low-tax locations. The subsequent OECD proposal to implement this global minimum tax is a landmark decision since even low-tax jurisdictions like Ireland, Hungary, and Estonia have agreed to join the agreement. 

For years, businesses have utilized a variety of inventive bookkeeping methods to illegally avoid tax liabilities by shifting money to low-tax locations. According to a 2018 study published by Gabriel Zucman, an economics professor at the University of California at Berkeley, around 40 percent of multinational firms’ worldwide profits are “artificially shifted” to tax havens. Big tech firms like Google, Amazon, and Facebook are notorious for taking advantage of this practice, with OECD describing these companies as “the winners of globalization.” Some European countries that imposed digital taxes on big tech will replace them with GloBE once the agreement becomes law. It’s expected that diplomats from participating nations will finalize a formal deal to implement the new rules by 2023.

Wider implications of global minimum tax

Possible implications of global minimum tax may include: 

• Multinational corporation tax departments may see their headcounts grow as this tax regime may require greater global coordination to ensure the proper application of taxes in each jurisdiction.
• Large corporations pushing back and lobbying against the global minimum tax.
• Companies deciding to operate in their home countries instead of abroad. This can lead to unemployment and income loss for developing economies and low-tax nations; these developing countries may be incentivized to align themselves with non-Western powers to protest against this legislation.
• OECD and G20 collaborating further to implement additional tax reforms to ensure that big firms are taxed properly.
• The tax and accounting industry experiencing a boom as companies hire more of their consultants to navigate the complex rules of the new tax reforms. 

Questions to comment on

• Do you think the global minimum tax is a good idea? Why?
• How else is the global minimum tax going to impact local economies?