Supply chain disruptions have led companies to rethink their global supply chain strategies and global business models. International merchandise trade has leveled off over the years, and globalization is moving towards a “think global, make local” model — a change from the current model of making items in low-cost countries and then shipping them elsewhere. . At the same time, companies are also operating in an increasingly digital world, whether this manifests in their internal business processes or in the value delivered to customers.
Along with these changes, the global tax framework is also undergoing a fundamental shift from tax competition to tax cooperation. In recent decades, countries, including the United States, have reduced tax rates to attract business investment. Multinational companies have legitimately been able to reduce their global tax bill by taking advantage of these differences in rates and tax rules. In order to stop a race to the bottom, countries are now considering regrouping.
“After decades of undermining each other, 139 rich and poor nations are moving closer to a multinational corporate tax framework that would be the biggest change in the system since 1923,” according to a Bloomberg Tax article. “The aim is to create a united front to prevent companies from playing one country against another, recognizing that a race to the bottom in taxation has no winner, only a group of losers deprived of income. “
One potential avenue explored by world leaders is a global minimum tax that requires companies to pay a minimum tax on their global income. Here is an example of how such a system could work, as explained in a document for the Atlantic Council by Jeff Goldstein, former special assistant to the president of the White House Council of Economic Advisers:
[A]Suppose country A has a corporate tax rate of 20% and country B has a corporate tax rate of 11%. The worldwide minimum tax rate is 15% and Company X is headquartered in Country A but declares income in Country B. Country A would “top up” taxes paid on profits made by Company X in Country B equal to the difference in percentage points between Country B’s rate of 11% and the overall minimum of 15% (for example, Company X would pay in taxes an additional 4% of the profits declared in country B). This approach would set a floor on global tax revenue collection and help change incentives for businesses, as businesses would know that profits transferred to tax havens would be subject to additional taxation.
The idea of a global minimum tax was originally proposed in 2019 by the Organization for Economic Co-operation and Development (a group of 35 mostly developed countries) alongside a digital tax. While US tax rules already include a version of a minimum tax on global profits, President Biden is proposing to increase this minimum tax rate from 10.5% to 21% on foreign income of US corporations in order to counter international tax planning strategies that take advantage of tax rate arbitrage. With that in mind, Treasury Secretary Janet Yellen is working with other countries to strike a deal on a global minimum tax. France and Germany have pledged their support, while others, including countries that use low tax rates to attract foreign investment, are still under discussion.
The possibility of a digital tax – another measure aimed at taxing businesses based on the location of their customers – would primarily affect tech companies and businesses in digitally-driven industries such as e-commerce and online advertising. . The notion of a digital tax has been controversial in the past due to the perception that such a tax unfairly targets US technology companies; this perception led the Trump administration to withdraw from these discussions.
These international discussions on a global minimum tax and a digital tax have now received a boost thanks to Biden’s tax proposals to fund infrastructure investments and also his willingness to re-engage in exploring alternative approaches to operating d ‘a digital tax.
Anticipate the impact
International tax rules are complicated. The evolution of globalization and digital business models involves rethinking sourcing strategies, operating sites, sourcing and delivery channels, scope of centralized versus decentralized operations, sharing of technology and intellectual property, talent management and related investments – and corporate taxes have an impact on each of these decisions. Multinational companies may be concerned about any tax increase, but they also want security and simplicity. US-based businesses will need to consider the interplay between a potential global minimum tax and evolving US tax policy, which should encourage the relocation of manufacturing operations and also ensure that global profits are properly taxed.
These national and global tax policies, if well designed, have the potential to simplify the tax framework by eliminating some redundancies. A global minimum tax can reduce or eliminate compliance with other global tax rules that become redundant in a system where there is no tax arbitration. At the same time, such a tax can increase compliance issues and the possibility of businesses getting caught up in disputes between governments trying to collect a larger share of taxes under the new framework.
There are a lot of negotiations that need to be done for a global minimum tax to be successful, and there are a lot of practical issues that need to be resolved before it becomes an effective reality. In a post-pandemic world where countries must fund fiscal stimulus spending, rebuild supply chain and infrastructure, and respond to growing calls for tax fairness, we can be sure that tax policy will be at the forefront. Multinational companies can argue that an increase in global tax rates could reduce their competitiveness and their ability to create more jobs. Research indicates that most of the benefits of tax rate cuts during the 2017 U.S. tax reforms went to shareholders, not workers. Countries must agree on a fiscal framework that encourages job creation, competitiveness and a level playing field. As multinational companies adapt to new supply chain models, the ability to adapt to changing tax laws is also essential.
Shruti Gupta has over 15 years of experience advising multinational clients on transfer pricing planning, supply chain structuring, global compliance and controversy management strategies. She is a Senior Analyst in RSM’s Industry Eminence program, which positions its analysts to understand, forecast and communicate the economic, business and technological trends that are shaping the industries served by RSM.