Jan 3, 2024
Global minimum tax of 15% on multinationals comes into effect
As of 1st January 2024, global minimum tax of 15% has come into effect for multinational companies with an annual turnover of more than €750M in EU Member States, the United Kingdom, Norway, Australia, South Korea, Japan, and Canada. While the United States and China supported the agreement in 2021, they’re yet to implement the Organisation for Economic Co-operation and Development (OECD) tax reform.
The framework of the minimum effective taxation rules is based on two pillars, with Pillar 1 aiming to encourage multinational companies to pay more taxes where they operate, while Pillar 2 establishes a global minimum corporate tax rate. For instance, if a company with headquarters in the EU Member State has operations in a country with a corporate rate of e.g. 9%, the headquarters will cover the difference by paying 6% additional tax in the relevant EU Member State, in order to reach the minimum corporate tax rate of 15%. In brief, the adoption of OECD tax reform by participating countries will incentivize other countries to take part, rather than simply observing those participating countries collecting the tax difference as additional tax revenue.
As one of the countries joining the international tax reform, Cyprus’ Ministry of Finance has issued an announcement on 3rd October 2023 for a draft legislative proposal ‘The Safeguarding of a Global Minimum Level of Taxation of Multinational Enterprise Groups and Large-Scale Domestic Groups in the Union Law of 2023’, aiming to implement Pillar 2 global minimum tax rules. The Cyprus government plans to bring this legislative proposal forward by 31st December 2023, in accordance with the Council Directive (EU) 2022/2523. The law will be effective for accounting periods beginning on or after 31st December 2023 in relation to the Income Inclusion Rule and for accounting periods beginning on or after 31st December 2024 in relation to the Undertaxed Profits Rule.
While there are speculations that the tax competitions between jurisdictions with low tax rates might morph into tax credits and subsidies, with investment hubs coming up with new incentives and exemptions, the OECD tax reform has been praised as “the super smart design” by Jason Ward, the Principal Analyst at the Centre for International Corporate Tax Accountability and Research, stating for Financial Times that “it will reduce the incentives for companies to use tax havens, but also the lure for countries to become tax havens”. Further, Manal Corwin, Head of Tax at the OECD stated “the future footprint is the value of what’s being delivered”, adding that through the elimination of distortions in the system, she ultimately expected more taxes to be paid “where economic activities take place”.
Quoting Paolo Gentiloni, European Commissioner for Economy, “This new year marks a new dawn for the taxation of large multinationals. The entry into force in Europe and in jurisdictions around the world of this historic reform marks a major step towards a fairer corporate taxation system. By lowering the incentive for businesses to shift profits to low-tax jurisdictions, the new rules will help curb the so-called ‘race to the bottom’ on corporate tax rates in the EU and globally. I encourage all signatories to the global tax agreement to walk the talk and also enact swiftly this key reform, which has the potential to generate an extra $220 billion annually to help countries around the world to fund crucial investments and high quality public services.”
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