What Global Minimum Tax Means for Global Citizens

A new framework on international taxation, the Global Minimum Tax, was established in a historic meeting of 130 OECD countries, which represents 90% of the global GDP.

This new framework is meant to create a standardized international taxation system for top multinational companies engaged in business in multiple countries.

The objectives behind this new framework are to ensure that large Multinational Enterprises (MNEs) pay tax where they operate and earn profit, as well as to provide stability to the international tax system.

The Global Minimum Tax may affect you, even as a digital nomad, so let’s find out what it means in this guide.

What Global Minimum Tax Means for Global Citizens

Global Minimum Tax – Overview

The 2 pillars of the Global Minimum Tax framework are:

  1. Fair profit distribution and taxing rights for major MNEs globally.
  2. Implementing a global minimum corporate tax to safeguard national tax bases.

The first pillar will ensure that MNEs pay taxes in the countries where they have a significant market and earn their revenue from. MNEs, especially digital businesses like Google and Facebook have a presence in every country of the world, in terms of customer base.

However, they don’t have any physical presence in many countries, making it difficult to tax them in such countries.

This called for taxes like GAFA tax i.e. Google, Apple, Facebook, Amazon tax in France, Equalization levy tax in India, and a Digital Service Tax in other countries. But this new provision will remove the need for such taxes.

Currently, it is proposed to apply this provision to Top 100 companies.

Taxes for digital nomads

The second pillar of this framework is introducing a Global Minimum Tax on MNEs of 15% to stop competition between countries over who can offer companies the lowest rate — what critics call a “race to the bottom”.

A lot of countries move their business operations to countries that provide low or zero corporate tax rates (also known as Tax Havens).

Tax havens have been criticized a lot, as a medium of tax evasion by the rich and cause of reduction in local business and job creation.

However, a lot of developed countries have used this method of low taxation to attract investment in the past.

Now, the same developed countries are against it based on the fear that low taxes of other countries might affect their own economy.

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Arguments in Favor of Global Minimum Tax

Of course, just like all tax agreements, there are arguments in favor of the Global Minimum Tax, so let’s talk about these first.

MNEs And Tax Evasion

It will ensure that MNEs aren’t allowed to evade tax in their home country by getting themselves registered in Tax havens.

According to some experts, a lot of MNEs thrive on making a living out of tax optimization and using their tax consultants, to hardly pay any tax anywhere in the world.

Proponents argue that it is necessary to curtail such practices in order to have a fairer playing ground among MNEs and local businesses.

Countries with Low Corporate Tax

In the context of the global minimum tax, the lower corporate tax rates in many countries compared to personal income tax rates highlight a key issue.

This disparity often appears to benefit large corporations at the expense of individual workers and small businesses, creating a sense of bias within the tax system. The introduction of a global minimum tax aims to address this imbalance.

By setting a floor for corporate taxes, it seeks to reduce the incentive for corporations to shift profits to low-tax jurisdictions, thereby ensuring a more equitable distribution of tax burdens.

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Developed VS Developing Countries

Many developing countries opt for lower corporate tax rates as a strategy to attract foreign investment.

This approach is often seen as a shortcut compared to building a robust and efficient tax administration system. Advocates for a global minimum tax argue that such tactics, which they view as ‘lazy’, should be curtailed.

The global minimum tax concept aims to encourage countries to strengthen their tax systems and reduce reliance on low tax rates as a primary tool for economic allure. This shift is expected to foster fairer tax practices and a more balanced global economic landscape.

Double Tax Agreements

Varied tax laws across countries introduce complex compliance requirements and the risk of double taxation.

To mitigate these challenges, countries often form double taxation agreements (DTAs). However, a global minimum tax rate could simplify this landscape.

By standardizing the minimum tax rate internationally, the need for numerous DTAs could be reduced, streamlining tax compliance and reducing the administrative burden.

This uniform approach aims to create a more straightforward and transparent global tax system, benefiting both corporations and tax authorities.

Income tax for freelancers

Issues With the Global Minimum Tax

Other than the positive points above, there are potential issues with Global Minimum Tax that should be taken into consideration, especially from the point of view of small business owners.

Fiscal Autonomy

The Global Minimum Tax raises concerns about national fiscal autonomy, particularly for countries leveraging lower tax rates to attract foreign investment.

This policy could impact nations with limited resources or development, who depend on such fiscal strategies to stimulate investment and growth.

The introduction of a uniform tax rate might challenge these countries’ ability to compete economically on the global stage, potentially affecting their efforts to improve their economic status.

It’s a nuanced issue that balances global tax equity with respect for individual country strategies and their unique economic contexts.

At the time of writing, 6 countries have opted to vote against this framework. These countries include three EU countries (Estonia, Hungary, and Ireland), as well as Nigeria, Kenya, and Sri Lanka. 133 countries have agreed to the agreement.

MNEs May Cut Jobs

When MNEs are forced to pay higher tax, as historical evidence suggests, they tend to lower their expenses by cutting jobs, cutting down on pay raises for workers, delaying or scrapping investments in new machinery and equipment, etc. to compensate for the loss.

This harms the public at large of the country in which such MNEs operate.

Global Minimum Tax

Big Corporations VS Small Businesses

Taxing the big listed corporations has an adverse effect on the vision of small businesses. Big corporations also started as small businesses at some point in time.

Higher tax on corporations discourages the current small businesses from expanding their business into large corporations.

This will hamper them and the economy from achieving economies of scale leading to job creation and development.

Tax Exemption Schemes

There are plenty of other tax exemption schemes available that have shown that even though there is no direct contribution in tax form, revenue can be created through other forms.

All the latest Digital Nomad Visas, all created in the last year. Some offer a full tax-free year stay, recognizing the economic benefits of nomads spending in local economies, leading to their tax exemption.

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Why are we Talking About MNEs When You’re a Small business?

Governments often test new tax policies with larger entities, like MNEs, before possibly extending them to smaller businesses.

This could include a global minimum tax initially targeting MNEs, then expanding to include medium-sized businesses.

While digital nomads and global citizens pick countries for their unique benefits, this doesn’t mean the end of tax havens.

However, the clarity and operational details of new tax laws, like the global minimum tax, remain uncertain. They likely won’t be in effect until later in 2023.

Under the proposed global minimum tax, countries may still set their corporate tax rates. Yet, if a subsidiary is taxed below 15% in one country, the parent company’s country could impose additional tax to meet this minimum rate.

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So, no more Tax Havens?

Even though Tax Havens like The Bahamas have joined the agreement, they may have also done so under a lot of international pressure.

It wouldn’t be the first agreement that is drafted at the international level but then sees a completely different application once it goes through the whole national legislative system to effectively become law.

If you were planning to register your company in an overseas tax territory to enjoy lower corporate tax, you might want to keep this new agreement in mind (although if you aren’t an MNE it shouldn’t just yet apply to you).

Conclusion

All is not lost, as there are a lot of detailed rules and regulations of this policy that are yet to be designed. These rules might have exceptions for small and developing economies as demanded by them.

Further developments are yet to be seen.

If anything, I think our nomadic entrepreneurs need to be the least worried ones as they’re the ones who are flexible and quite mobile in terms of relocating themselves.

But for those who are still living in high-taxing Western countries and trying to set up overseas structures to benefit from, you might want to pay closer attention to this new policy if it is successful.

Thanks to Werner Heyvaert’s article on the Kluwer Tax Blog that inspired this blog post created for Global Citizens.

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    NOTICE: The content of this article is not to be considered as a legal opinion or tax advice. Wanderers Wealth does not hold itself out as a legal or tax advisor. If you want to receive a legal opinion or tax advice on the matter in this article please contact us directly and we will refer you to a legal practitioner.

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