Global economic indicators revealed that between 1985 and 2020, the average global statutory corporation tax has decreased from 49% to 23%. In the United States, the picture isn’t painted any differently, with average corporation taxes sharply decreasing from 50% to just 17% in 2020. The influx of globalization has led to the mass expansion of multinational companies and corporations. With this in mind, the Group of 7 (G7) nations in collaboration with The Organisation for Economic Cooperation and Development (OECD) have combined efforts to approve a global corporate tax rate of 15% to mitigate profit shifting and low international corporate taxes.
After more than three years of debate, the OECD and G7 nation leaders have finally agreed on the appointed international tax rate in June 2021. In an ongoing effort to help stabilize national economies and attract investors, more than 132 developed and developing nations across the world have signed and approved the agreement of a new global minimum tax rate. But while some nations such as Ireland, Hungary, Barbados, and Gibraltar who houses the world lowest corporate tax rates in the world might seem opposed to the idea – where has it left new corporations forming within the United States, and how will the decision change the course of incorporation in America?
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Multinational corporations, such as Amazon, Facebook, and Google have shared a great deal of success in the U.S. and nations abroad. Low tax corporate tax countries have been attractive offshore havens for hundreds of multinational groups. Companies have started to shift their profits to these tax havens to avoid high-corporation taxes in their operating or home country. Some estimates by the OECD have revealed that profit shifting can cost governments anything between $100 and $240 billion in lost corporate income taxes.
Large multinational corporations have seen their taxes decrease over time, allowing them to increase profit-sharing among stakeholders. The process is neither politically or economically viable in the long run, resulting in billions of dollars of taxable income being lost each year. Data from 2017 revealed that more than $3 trillion of tax income from multinational companies in the U.S. were allocated in tax havens across the world. In the U.S. alone, these companies accumulated more than $4.2 trillion in total earnings in 2017 alone. Moving these corporations and paper profits offshore have become lucrative for some, while others lose out.
Since the adoption of the Tax Cuts and Jobs Act pushed by former President Donal Trump, federal corporate tax has fallen to 21%. This low tax rate seemed more attractive to some large corporations, but although the new international corporate tax rate will start at 15%, estimates have shown that countries are looking to increase the rate over time.
For U.S. corporations, this will mean that they will need to pay an additional tax rate, above their home country rate, which is 21%. What we can expect is a rollover of multinational corporations exiting these tax havens, to solely operate and transact in their countries of origin.
The new deal arranged by G7 and G20 countries puts more legal aspects on the shoulders of multinational countries, pushing them to fully declare any taxes paid on foreign and domestic soil. Stakeholders will be left with a choice to either withdraw from international investment or shift paper profits to a different offshore tax haven.
There are concerns regarding large corporations who may still be able to avoid the new tax rate as the new deal will only apply to companies with a profit margin higher than 10%. It may seem like a positive aspect for these corporations, but overall the U.S. economy may still only see limited investment from these multinational companies.
The new deal may bring hope to many countries that are currently losing billions each year in income taxes. Multinational companies are now being placed under the spotlight, to address a race to the bottom which will see these companies pay less in taxes across the world. It might stifle initial investment opportunities, but it’s not clear whether withdrawal from other countries will increase investment and job creation in the U.S.