Many of the world’s most powerful business enterprises are infamous for their acumen in sharply reducing their tax liabilities. Technology giants such as Apple and Google come to mind in this regard; they are known to set up corporate presences in jurisdictions where revenues can be redirected, and where tax rates are considerably lower when compared to their home offices.
The high-profile accounting and law firms that help global corporations set up tax shelters tend to give their strategies colorful names such as the “double Irish with a Dutch sandwich,” which has been around since the 1980s, and which was extensively used by Google for many years until the company faced enormous pressure to dismantle it.
Measures such as a global corporate minimum tax, mentioned here, are designed to create a fairer system and prevent big companies from avoiding taxation. To a certain extent, the idea is to make offshore tax havens less enticing to business giants. This international initiative was spearheaded by the Organization for Economic Co-operation and Development (OECD), and it was agreed upon by its 38 member nations plus 99 other jurisdictions.
The global corporate minimum tax was set on paper at the 15% rate in October 2021, but we will not see it go into effect until 2023, which is when many of the signatories plan to enact it and set up enforcement thereof. Some countries plan to move faster than others and start charging this rate later this year. Geopolitical analysts believe that most nations will set their rates exactly at 15% so that their respective governments can boast of fostering a corporate-friendly climate.
As laudable and unprecedented as this initiative appears on paper, its efficient application and its impact remains to be seen. It should be noted that a minimum tax rate on multinational enterprises will not be standard; it is already higher than that in many countries, and it is not as attractive as what offshore tax havens offer, but it may work towards enticing executives to shift revenue back to their home offices if they can take advantage of simplified reporting processes.
Major corporations that take advantage of tax loopholes do so for their bottom lines and to keep shareholders happy, but this does not mean that executives are particularly fond of these practices. In countries such as Germany and the United States, the reporting and remittance of corporate taxes is a complex affair that is even more convoluted than the aforementioned double Irish strategy. Executives will jump at the opportunity of paying a minimum corporate tax if they can avoid having to pay an army of lawyers and accountants to lower their taxation outcomes.
It remains to be seen whether developing countries that benefit from corporate taxation will be able to apply the minimum rate set by the OECD. One provision in this resolution calls for international cooperation to alleviate the economic shock some developing nations will absorb with this initiative, but there are no specific plans on how this can be accomplished. There is also the delicate matter of established free trade zones; in Brazil, for example, these business and industrial areas have been transformed into small cities where thousands of families reside, and the same can be said about other countries such as the United Arab Emirates and Costa Rica.