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Single Tax Rate to Challenge International Businesses

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(Scott Winterroth, Unsplash)

4 Sept. 2021. Most of the world’s countries and leading economies approved a common corporate tax rate that could well change the way business is conducted and taxes are calculated worldwide. The proposals are expected to particularly affect technology enterprises doing business worldwide, where research generates discoveries and intellectual property that can be easily managed across borders from the most tax-friendly sites.

The new framework for international tax reform is an initiative of the Organization for Economic Co-operation and Development or OECD, is a group of 38 countries with developed economies, mainly in North America, Europe, and Asia-Pacific, but also Israel, Chile, Colombia, and Costa Rica. The OECD proposal establishes a minimum common corporate tax rate of 15 percent, to prevent relocating a business’s headquarters to find locations with the lowest tax rates. The proposal also creates a mechanism for transferring taxing rights from home-office countries to locations where multi-national companies, particularly those in digital industries, do business and earn profits.

OECD estimates the common minimum 15 percent corporate tax rate will generate an additional $US150 billion in additional global tax revenues each year. And taxing rights on more than $100 billion are expected to be reallocated from multi-national enterprises’ home-office countries to countries where the companies earn their money. The organization says the new tax scheme will ensure a fairer distribution of profits and taxing rights, and put a floor on competition among countries to lure businesses with preferential corporate tax rates.

“This package does not eliminate tax competition, as it should not,” says OECD Secretary-General Mathias Cormann in a January 2021 organization statement, “but it does set multilaterally agreed limitations on it. It also accommodates the various interests across the negotiating table, including those of small economies and developing jurisdictions.”

End the “race to the bottom”

OECD issued the statement after gaining agreement to the proposal from 130 countries and jurisdictions that the organization says represents more than 90 percent of worldwide gross domestic product. In June 2021, finance ministers of the Group of Seven advanced Western economies also endorsed the common minimum corporate tax rate. In a statement reported by the New York Times, U.S. Treasury secretary Janet Yellen said the “global minimum tax would end the race to the bottom in corporate taxation, and ensure fairness for the middle class and working people in the U.S. and around the world.”

Although much of the minimum tax proposal is aimed at large companies in the technology industry, multinational enterprises can comprise companies of all sizes and in a range of sectors. Businesses often turn to their accountants for tax advice, and this issue will likely generate many questions for accountants. Companies doing business in France should seek advice on taxes from an accountant in France, for example, or elsewhere in countries where companies do business.

A chart compiled by CNBC shows a wide variation in corporate tax rates, from 50 percent for some types of businesses in the Comoros Islands to less than six percent in Barbados. In addition, notes CNBC, 15 countries have no corporate tax rates, including so-called tax havens like Bermuda, Cayman Islands, and British Virgin Islands. The CNBC story quotes an international tax expert saying, “It’s unclear where things will settle in a few years.” He notes as well that many questions remain how the new minimum tax will be applied and which parts of corporate incomes are taxable.

Because of those outstanding questions, businesses will need timely advice about their tax liabilities. For those international companies doing business in France, Vachon Associes is a certified public accountant to consider for advice on taxes about the OECD initiative.

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