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The Global Minimum Tax is coming – what do you need to know now

In July, the seven leading industrial nations USA, Canada, UK, Germany, Italy, France and Japan have agreed on a new global minimum tax. In the future, companies in each of those countries will have to pay at least 15 percent of their profits and each country is free to set a higher rate.

Here is what you need to know now:

Why have the G7 implemented a new regulation and who is affected?

This regulation affects corporations or their business units that generate a minimum turnover of 20 billion euros and a profit of ten percent of revenues. Approximately, around 100 companies worldwide will be affected, among others large American tech giants like Amazon, Apple, Google, Facebook and Microsoft.

For years, many corporations avoided the taxes through loopholes and complex corporate networks and shift profits back and forth between the countries in which they operate. This way, they achieved that they would pay the lowest tax rates possible. – from only 12,5 % in Ireland to no corporate tax at all like in Bermuda.

The overall goal of the reform is to increase tax revenue in the respective countries and make tax havens like Ireland and Cyprus but also the Cayman Islands or Bermuda less attractive. The new resolution obliges corporations to state exactly in which country profits have been made and pay the taxes in the respective country.

Who benefits worldwide from the reform?

The G7 hope for additional revenues that would compensate at least partially for the tax losses from the Corona crisis. In fact, according to a study from Oxford Economics, Germany and France, along with Italy and Spain are expected to benefit the most from the reform:

For instance, in 2028, government debt in relation to economic output would be around 1.4 percentage points lower for both Germany and France than without the reform.

Overall, according to calculations of the Organization for Economic Cooperation and Development (OECD), the worldwide introduction of a minimum tax could increase global corporate tax revenue by up to $100 billion annually. Another 100 billion could be generated by plans for a fairer distribution of taxation.

Even China, who is not involved, is hoping that large corporations like Alibaba close their locations in tax havens and return to China, thus increasing Chinese tax revenues.

However, smaller states that have attracted investors with low tax rates below 15 percent, such as Ireland, Luxembourgh and Cyprus, are concerned to lose their economic appeal on the market. In the past, they used their tax incentives to remain competitive with larger countries. Ireland for example considers the reform as assault on Irish Souvereignty, as each state should be free to define its own tax rates.

What happens now?

For now, the decision only affects the G7. It is scheduled to become effective in 2023. Further details and an implementation plan will be finalized in October at the earliest. Until then, countries who oppose the reform such as Barbados, St. Vincent, Ireland, Hungary and Estonia, are welcome to submit alternative proposals.