Global Tax Concept with Globe Surrounded by Currency

G-20 leaders met in Rome in late October 2021, and part of their discussions revolved around approving a global minimum tax on corporations. 

If the deal moves forward, it represents a culmination of eight years of discussions.

The Whitlock Co. explains what you can expect from this agreement.

What the Countries Approved

Leaders of the pact approved a 15% minimum global tax on corporations through the Organisation for Economic Co-Operation and Development (OECD), according to the Tax Foundation.  

Of the 140 countries involved in the negotiations, 136 signed off on the proposal in July 2021. The overall goal is to increase global minimum taxes on multinational companies, particularly to gain more tax revenues from companies in low-tax jurisdictions.

The top tier of this tax would go to companies with more than 10 billion euros ($11.5 billion in revenues and a profit margin above 10 percent. Companies in the extractives sector (petroleum and mining) as well as financial services companies are exempt from the tax.

The leaders of the G-20 countries approved the pact in principle ahead of the formal meeting in Rome, according to CNBC

Overall Ideas of the Proposal

The main idea behind the global minimum tax is to rein in shifting profits to low-tax havens for the world’s largest multinational corporations. The second goal is to create a formula by which companies are taxed based on where they do business instead of where they book profits, typically driven by the increased nature of digital business models and e-commerce.

How the Proposal Would Work

The leaders of 136 countries agreed to the pact. Depending on how their domestic leaders and laws work, some countries may not have yet officially made this global tax a law in their jurisdictions.

Companies subject to the tax would pay a portion of tax revenues to the country where they are based and another portion to a country in which they do business. 

For example, an American company would shift some of its tax revenues away from the U.S. Treasury to pay taxes to the Canadian government. Meanwhile, a company based in Canada would reduce its tax liability within its home jurisdiction while paying more to the United States.

While the U.S. Treasury would lose some tax revenues from American-based companies, it would gain more from foreign companies who do business in the United States.

Nothing Set in Stone

There is one major hurdle facing regulatory approval in the United States.

The Treaty Clause of the U.S. Constitution, shown in Article II, Section 2, Clause 2, states that the president can negotiate treaties with other countries while a supermajority vote (⅔) of the Senate must approve the treaty for it to become law. 

Sen. Pat Toomey of Pennsylvania opposes this global tax measure, a fact he stated in September 2021. He said he would invoke the Treaty Clause to force a two-thirds vote to ratify the treaty. The current Senate is deadlocked at 50-50 between one party and the other, and experts believe there is no way both sides will agree to ratify this minimum global tax as a treaty.

This same tactic sank the formation of the League of Nations following World War I. Several nations ratified the treaty to strengthen international relations, but the United States did not, due to the Senate’s inability to muster a two-thirds majority vote in 1919 where it failed by a vote of 55 to 39.

Plus, there is also the issue of how countries would collect the taxes. Are these collections computerized? Are they automatically collected? What computer protocols and security would jurisdictions use?

Contact The Whitlock Co. Today for Sound Advice

The CPAs and business advisors at The Whitlock Co. can help you navigate tax issues, tax planning, and business planning issues your business may face in the coming years. Contact us for more information.