Long Road Ahead to Proposed G-7 Tax Reforms
The recent endorsement of US President Joe Biden’s proposal for a global minimum corporate tax by the G7 leaders (United States, Britain, France, Germany, Canada, Italy, and Japan) signifies a major step forward for the cross-border global tax regime.
COVID-19 has highlighted the issues of inequalities and fairness all over the world; incidents such as recent news reports on US billionaires and companies paying little to no tax have continued to bring this issue forward.
The Group of Seven leaders that recently occurred in Britain has led to the endorsement of a US President Joe Biden’s proposed global minimum tax of 15% in the countries that multinational companies operate in. As it stands, this amount is lower than Singapore’s current corporate tax rate of 17%. The proposed global minimum tax would apply to global companies with at least a 10% profit margin, and 20% of any profit above that minimum would be taxed.
According to UOB senior economist Alvin Liew, “This deal has to do with updating a tax system to be relevant to a complex, global digital economy.”
The tax is partially aimed at helping governments recoup the billions of dollars they will need to help pay off debts incurred during the COVID-19 crisis and even out existing inequities in society.
Although the global minimum tax has garnered the support of the G-7, it will still have to be discussed at the G-20 meeting, which includes China and India. It will then be brought up at the planned meeting of 139 jurisdictions and member countries of the Organisation for Economic Co-operation and Development (OECD) in Paris.
Should the deal be implemented, each individual tax jurisdiction would need to think about its response, both in terms of legislation and fiscal policy; “In Singapore’s case, this may involve reworking tax and non-tax investment incentives to maintain Singapore’s competitive edge in international business,” said Mr. Sandareswara Sharma, a tax lawyer and consultant at Malkin & Maxwell.
The implementation of this global minimum tax would also cause global companies to rethink their tax strategies, as MNCs can currently legally avoid tax by setting up local branches in countries with low corporate tax rates and declaring profits there. The change would mean that they would no longer be able to only pay the local rate of tax, even if profits come from sales made elsewhere.
Forcing companies to pay tax where they are selling their products and services and preventing countries from undercutting each other in a race to the bottom of the tax ladder through the standardisation of a tax rate has not been welcomed by all.
Entities such as big tech and healthcare players, who will be most directly impacted by the changes in the global tax regime, could see about a 5% higher tax burden. Similarly, tax jurisdictions like Japan, Taiwan, and Ireland could see higher tax rates, with Ireland in particular saying that any deal on a minimum rate must meet the needs of “small and large countries, developed and developing.”
Thus, the negotiation period for the final global tax deal may not arrive until late this year, as nations will need to pass the plan through their respective legislatures. The road to the implementation of the final destination is still a long one.
The full article, as reported by The Straits Times, can be accessed here.