Multinational Corporations' Tax Avoidance Effectively Blocked
Up to 90 Trillion Won More Taxes May Be Paid Annually
[Asia Economy Reporter Kim Suhwan] A green light has been turned on for the introduction of a global minimum corporate tax, expected to be the most innovative change in the global corporate tax system in a century. The finance ministers of the G7, a group of seven major advanced countries (United States, Japan, Germany, United Kingdom, France, Italy, Canada), are scheduled to hold talks in London, UK, on the 4th of next month (local time). Foreign media reports suggest that a global minimum corporate tax agreement will be reached at this meeting. Attention is focused on whether a major global corporate tax reform, the first in 100 years, will become a reality.
Global Minimum Corporate Tax Introduction Will Virtually Eliminate Tax Havens
The global minimum corporate tax is a system that sets a minimum tax standard worldwide, and if the corporate tax of an overseas subsidiary falls below this minimum, the difference is paid to the country where the headquarters is located. This system is being discussed to prevent so-called profit shifting by multinational corporations, which transfer sales to countries with low corporate tax rates to avoid taxes.
After continuous allegations of tax evasion due to profit shifting by multinational corporations, the necessity for all countries worldwide to impose the same level of corporate tax was raised. Following the inauguration of the Joe Biden administration, the United States proposed setting a minimum corporate tax rate, which accelerated discussions on the global minimum corporate tax. Initially, there was disagreement among some G7 countries wanting a lower rate than the proposed 21%, but the U.S. Treasury Department advanced discussions by proposing a revised plan to lower the global minimum corporate tax from 21% to 15%.
Subsequently, if the G7 leaders reach a final agreement and the Organization for Economic Cooperation and Development (OECD) meeting this summer, attended by 140 countries, also reaches a final agreement on the comprehensive global minimum corporate tax introduction, the system is expected to be officially implemented.
Multinational Corporations’ Annual Corporate Tax Payments Could Increase by Up to 90 Trillion Won
According to foreign media, the introduction of the global minimum corporate tax is expected to result in multinational corporations paying an additional corporate tax ranging from at least $50 billion (approximately 56 trillion won) to up to $80 billion (approximately 89 trillion won) annually.
The countries most affected by this global minimum corporate tax will be those with corporate tax rates below 15%, such as Ireland and Macau. Once the global minimum corporate tax is introduced, if the effective corporate tax rate paid by a specific company abroad falls below 15%, the company’s home country can impose additional taxes to offset the difference. This effectively eliminates the benefit of transferring profits to tax havens to reduce corporate taxes. In particular, it will block the ‘legal tax evasion’ practices of multinational corporations headquartered in the Cayman Islands and Virgin Islands, where the corporate tax rate is 0%, which have been used to avoid tax payments.
On the 5th (local time), the G7 Foreign Ministers' Meeting, a gathering of seven major advanced countries, took place in London, UK. [Image source=EPA Yonhap News]
Additionally, although Hong Kong and Singapore have corporate tax rates between 15% and 21%, the effective tax rate falls below 15% when various tax incentives provided by the authorities are applied, so these countries are also expected to be affected.
According to Goldman Sachs, the majority of U.S. multinational corporations currently earn more than 50% of their operating profits overseas, and their effective corporate tax rates are below 15%. Furthermore, a 2019 International Monetary Fund (IMF) survey found that up to 40% of foreign direct investment in a country is so-called ‘phantom investment,’ which is completely unrelated to local economic activities. This suggests that sales generated in other countries are being shifted to these countries for tax avoidance purposes.
Since the COVID-19 pandemic began last year, growth stocks such as big tech companies have grown explosively, and tax avoidance through profit shifting is also evaluated as having contributed to this profitability enhancement.
As this is a major corporate tax reform measure for the first time in 100 years, various analyses of its impact and consequences are emerging. Danske Bank of Denmark predicts that the introduction of the global minimum corporate tax could significantly increase corporate debt levels.
The Wall Street Journal (WSJ) reported, “Discussions on the introduction of the global minimum corporate tax will bring about a major change in global corporate taxes,” and added, “Multinational corporations that have avoided taxes so far must prepare for the impact of this system’s introduction.”
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