IBX-Jakarta. This year’s introduction of a global minimum corporate tax will transform how multinational companies invest overseas, according to an updated impact study by the OECD released on Tuesday. As the advantages of channeling profits through tax havens diminish, the flow of these investments will undergo a significant shift. Agreed upon initially in a groundbreaking deal in 2021 involving 140 countries, the global minimum tax rate is set to become effective this year. Already, 36 countries have implemented laws establishing a minimum 15% corporate taxation level, with more nations expected to follow suit.
In an effort to curb tax competition among countries, the agreement empowers governments to levy an additional tax to bring profits up to the 15% threshold on earnings recorded in jurisdictions with lower tax rates. Targeting large multinational entities with an annual turnover exceeding 750 million euros ($820 million), the global minimum tax primarily aims to discourage these corporations from channeling profits through low-tax nations such as Ireland and various offshore tax havens.
The Organisation for Economic Cooperation and Development (OECD), responsible for guiding the deal from negotiation to execution, predicts that the global minimum will halve the average difference in tax rates between havens and other countries, reducing it from 14 percentage points to 7 points upon implementation. Consequently, multinational investment decisions abroad are likely to increasingly depend on factors like the quality of the workforce, education, and infrastructure rather than the capacity of a location to minimize their overall tax burden, according to the OECD’s updated economic impact assessment.
David Bradbury, the OECD’s deputy head of tax, highlighted in a webinar that the global minimum tax diminishes incentives for shifting profits and, as a result, enhances capital allocation by amplifying the significance of non-tax-related considerations. Currently, around 36% of corporate profits are estimated to be taxed at less than 15%. However, this figure is expected to drop to just 7% after the global minimum tax is fully operational, as per the OECD’s projections. The OECD anticipates that governments worldwide will generate an additional $155-192 billion annually in corporate tax revenue due to this measure, marking an increase of 6.5-8.1%. This estimate has been revised down from the previous projection of $220 billion.
Source: OECD sees global minimum tax reshaping investment flows (msn.com)