Corporate giants have always employed clever accounting methods to keep their taxes at a bare minimum, but now it may get a little harder. The Organization for Economic Cooperation and Development (OECD) has recently announced that 130 countries, including Canada, have backed a plan to establish a global minimum corporate tax rate, which will aim to reduce the use of tax havens around the world.
The new global pact will seek to deter companies from relocating profits to jurisdictions where they would pay little to no tax, often in places where the company has little to no business presence. Additionally, it will curb the use of tax havens, a practice that has been widely criticized by regulators around the world. While some parts of the agreement still need to be fleshed out, some portions of the agreement may come into effect as soon as 2022 or 2023.
Agreement Calls for Minimum Corporate Tax Rate and Prevention of Jurisdiction Shopping
What is known so far is that the agreement outlines a 15% minimum corporate tax rate. Further, the proposal also aims to prevent or disincentivize firms from shifting their profits to lower tax rate countries where they have little or no business presence.
Countries Have Been Engaged In a “Race to the Bottom”
Looking at the tax rates around the world, according to the recent data from the Washington-based Tax Foundation, the average statutory corporate income tax rate in Canada is 26.5%, 12.5% in Ireland, and 23.9% globally. On average, the tax rates have been decreasing consistently since 1980, as countries attempted to increase their competitiveness and attract businesses to establish corporate headquarters. However, this practice has increasingly been referred to as a race to the bottom, as countries around the world have lost out on crucial sources of government revenue in their attempts to become financially attractive to businesses, making it difficult to fund essential infrastructure projects as well as other services. As a result, as U.S. Treasury Secretary Janet Yellen pointed out, lower taxes have failed to attract new business investment, and instead contributed to governments not being able to fund essential services like education and infrastructure.
French finance minister Bruno Le Maire said that the pact was “…the most important international tax agreement in history”. He further noted that corporate giants should pay their fair share of taxes in countries where they generate revenue, even if they have no physical presence there. The French government was among the first to impose a “digital tax”, targeting tech giants such as Amazon, Google, and Facebook, hoping to implement a ‘fairer’ tax scheme.
Manal Corwin, a former Treasury Department official, said that there were still many complexities to be polished, noting that what has been agreed on to date was the U.S. proposal. She added that it was important for the U.S. to ensure that other countries were committed to withdrawing their unilateral digital taxes. Many other countries, including Canada, have been toying with the idea of implementing a “digital tax”.
Finance Minister Chrystia Freeland, in the federal government’s fall economic update, said that Canada will proceed with the 3% tax on revenue generated online from Canadian users from January 1, 2022, unless an international deal on digital taxation is reached. However, Katherine Tai, a U.S. Trade Representative, has criticized Canada for planning to implement it without consulting its neighbours.
In her statement, Ms. Freeland said that the OECD announcement was a “tremendous achievement”. She added that this international agreement was good for Canadian businesses and workers as it will level their playing field in the global economy. She also noted that the government would continue to negotiate with international partners while focusing on Canada’s national economic interests.
Some Countries Have Not Yet Signed On
Of all the 139 countries present in the talks, not all of them have signed the deal. Ireland, a low-tax jurisdiction, for example, has declined to sign. Paschal Donohoe, Ireland’s Finance Minister, has noted that his country supported parts of the agreement but was reserved about the global minimum tax rate of 15%, outlining that Ireland’s current rate of 12.5% appears to be fair. He added that he was committed to working on a final agreement that Ireland would support.
Major tax havens that have signed the deal include Bermuda and the Cayman Islands, with major economic powers, such as China and India, also backing the deal. Other countries that have not yet signed the deal include Barbados, Kenya, Nigeria, Peru, Estonia, Hungary, Saint Vincent and Grenadines, and Sri Lanka.
Some of the proposals will require countries to sign a multilateral tax convention. However, the minimum corporate tax rate could be adapted by each country voluntarily through national legislation, something that tax experts have agreed could work. In this way, regulators will send a message to multinational companies that even if they move their profits overseas to avoid taxes, they will still be taxed at the minimum tax level in their primary tax jurisdiction.
While business executives should start to consult their tax partners about how these proposed changes may impact their businesses, nothing is in effect at this time. Signing a multilateral tax agreement will require continuous negotiations and is likely to take some time. However, what is known for sure is that once the agreement would come into effect, it would impact Canadian-based businesses, especially those with online and global presence.
Contact McCay Duff LLP in Ottawa for Corporate Tax Strategies, Advice, and Preparation
Contact the tax professionals at McCay Duff LLP in Ottawa to discuss how partnering with us can help save you and your business time, anxiety, and money when it comes to your taxes. Our tax advisors provide expertise in all aspects of corporate tax, ensuring compliance with tax laws while minimizing tax obligations. To learn more about how McCay Duff LLP can assist you and your business, please contact us online, or by telephone at 613-236-2367, or toll-free at 1-800-267-6551.
