On June 5, 2021, leaders of the G7 nations reached a historic tax agreement that will levy a global minimum tax rate of 15% on multinational companies regardless of where they are based. This will have substantial implications for corporate finance and tax leaders.
“This agreement is intended to combat large multinationals’ efforts to move profits to low tax jurisdictions,” said Ashwani Gupta, Director Analyst, Gartner. “If ratified, it will forever change the dynamics of tax incentives because profits shifted to low tax jurisdictions would face incremental taxation.”
The image below is an example of how a global minimum tax system is likely to work.
Seven actions on global minimum tax
The global minimum tax is not yet a done deal. It requires support from the G-20 leading economies, members of the Organisation for Economic Co-operation and Development, and individual governments. Nevertheless, finance and tax leaders need to scope its potential impact now. Gartner suggests these seven actions.
Action No. 1: Model scenarios
Most multinational companies will see an impact on their tax liabilities as a result of the global minimum tax, especially those companies that generate a large proportion of their earnings in countries with corporate tax rates below 15%. Tax leaders need to model scenarios to quantify the additional reserves that need to be set aside for future tax payments and understand how the changes affect their organization’s viability in new markets.
Action No. 2: Educate stakeholders
Tax leaders must be able to explain this deal and its potential consequences to senior business leadership. This should include the insights coming out of any scenario modeling, particularly so for public companies because senior leaders are likely to face questions on the tax deal and effective tax rate in earnings calls.
Action No. 3: Understand tax base definitions
Tax base is the taxable income on which taxes are computed. They differ from one country to another. For example, certain deductions are allowed in some countries while others might consider them nondeductible for tax purposes. It’s important to stay abreast of any changes in definitions in response to the global minimum tax rate and incorporate important differences into models and technology systems.
Action No. 4: Update risk factors
Global minimum tax is likely to increase multinational companies’ effective tax rate. They must add or update risk factors in their financial reporting and explain the risks arising from incremental tax liabilities.
Action No. 5: Tax process and technology modifications
The timing of the agreement becoming global legislation is uncertain at present, but it’s still important to assess the adaptability of existing processes and technologies in the face of impending change to computing tax provision and related compliance obligations.
Action No. 6: Revisit and reassess planning strategies
Countries with tax rates below the new global 15% minimum rate are likely to be unfavorably impacted by this agreement. The efficacy of current strategies involving such countries will potentially be diminished or wiped out. Tax leaders must reassess implementation of affected tax planning strategies.
Action No. 7: Make use of available incentives
Identify any unclaimed tax credits offered by countries to balance out their new incremental tax liabilities, such as R&D tax credits or environmental tax credits. Be on the lookout for new tax credits being instituted by countries to improve their competitiveness in response to the incremental global minimum tax.
Unanswered questions on global minimum tax
Many issues remain unresolved — on both the specifics and principles of imposing a global minimum tax. For example:
Q: Will there also be a uniform tax base?
A tax has two essential elements: a tax base on which tax is levied and a tax rate. An agreement on tax rate is gaining momentum but could be complicated by different countries defining differently what constitutes taxable income or the tax base.
To have a consistently applied global minimum tax, all countries would need to apply the same definition of taxable income and taxes paid to determine whether a business is paying below the global minimum rate. This is an area where more clarity is required before a meaningful agreement on global minimum taxes could become effective.
Q: Can global support be achieved?
There is likely to be resistance from countries with a corporate tax rate below 15% because this kind of change could be very disruptive to their economic model. These tend to be smaller states, however, so if enough advanced economies join into this agreement then the others will be forced to follow suit or face economic sanctions.
“It is important to be prepared for changes, but in the near term the agreement is insufficient to be applied globally,” says Gupta. “The changes will need the backing of over 100 other nations, and getting support from countries with tax rates lower than 15% could be challenging.”