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TaxEDU | 1
What is the Global Tax Deal and what
impact will it have on U.S. and foreign
multinationals?
Global Taxation
Global taxes in this case study refer to taxes levied
on U.S. and foreign multinational companies.
These companies my be headquartered in one
country (and tax jurisdiction) but have operations
such as manufacturing or sales in other countries
and tax jurisdictions.
Some multinationals strategically place their
operations in a way that minimizes their tax
burden, or how much they owe in corporate
income taxes (CIT) to the countries they operate
in. Oftentimes, low-tax jurisdictions are part of
these strategies to minimize CIT liability. This is
what the term tax haven refers to.
The Base Erosion and Profit Shifting (BEPS)
project in 2015 and later Digital Services Tax
(DST) proposals which came on the scene in
2018 were attempts to change tax rules for
multinational corporations and address cross-
border tax avoidance.
Cross-border tax avoidance occurs when
multinational companies seek low-tax jurisdictions
or exploit mismatches between tax systems to
reduce their overall tax burden. Countries that
are reliant on the CIT suffer more from this type
of avoidance, and the issue can only be fully
addressed by countries working together to close
gaps in their tax codes and limit the use of tax
havens.
The OECD and G20 countries worked together
to adopt an action plan to combat BEPS, with a
focus on limiting the ability to avoid taxation. The
15-point plan also sought to avoid introducing
double taxation as a remedy to the tax avoidance.
DSTs were meant as temporary policies targeted
at large, digitalized business models. By targeting
the digital presence of a multinational tech
company instead of the location of its physical
offices (think streaming services, social media, or
online retailers), governments saw an opportunity
to catch lost global corporate income tax revenue
generated by companies that operate worldwide
but only technically owe taxes in a home country.
These tactics proved to fall short in targeting
global taxation and instead created new trade
conflicts.
In the last few years, the Organisation for
Economic Co-operation and Development (OECD)
has discussed a more permanent and effective
plan to change tax rules for large companies
and continue to limit targeted tax planning by
multinationals. This plan was broken into two
pillars: Pillar 1 is focused on changing where
companies pay taxes, and Pillar 2 would establish
a global minimum tax.
The OECD Global Tax Deal
In October 2021, more than 130 countries (over
90 percent of the global economy) agreed to set a
minimum global corporate tax rate of 15 percent
starting in 2023.
Case Study 4:
Global Tax Deal
TaxEDU | 2
The Global Tax Deal is a significant shift in
international tax rules. The OECD’s plan aims to
reduce incentives for tax planning and avoidance
by U.S. and foreign multinational companies by
limiting tax competition and changing where
companies pay taxes.
To achieve this, the proposal is divided into two
independent plans: Pillar 1 and Pillar 2.
Pillar 1
Pillar 1 would expand a country’s taxing power
to include a share of profits from companies
that make sales in the country regardless of a
company’s physical location. This would result
in some companies paying more taxes in the
countries where their customers or digital users
are, even if the company has no permanent local
establishment in that country.
For companies with global revenues of more than
€20 billion (US $26.4 billion) and profitability
above 10 percent, 25 percent of profits above
10 percent would be taxed according to a new
formula based on where a company’s customers
are located.
Pillar 1 would also include dispute resolution
processes meant to improve tax certainty for
companies.
Pillar 1 Example
The company has $40 billion in annual revenues and
profits of $10 billion (a profit margin of 25%). $1.5 billion
of its profits will be impacted by Pillar 1.
Total Profits
$10.00
Profits above 10% Profit Margin (in
excess of $4 billion)
$6.00
Pillar 1 Profits (25% of profits above a
10% Profit Margin)
$1.50
Pillar 2 – Global Minimum Tax
Pillar 2 of the Global Tax Deal would limit tax
competition and the so-called “race to the
bottom” on corporate tax rates. It would establish
a minimum percentage for effective tax rates
applied to cross-border investment by large
multinational corporations that have a “significant
economic footprint” across the world, or a global
minimum tax. The proposed global minimum tax is
15 percent.
Pillar 2 includes three rules that apply to
companies with more than €750 million ($991.9
million) in revenues.
•
Income inclusion rule: determines when
a company’s foreign income should be
included in the parent (main) company’s
taxable income.
• Under-taxed payments rule: allows a
country to reject a deduction on cross-
border payments to the parent company.
• Subject to tax rule: makes it possible for
countries to tax inter-company payments
that would be under-taxed.
According to initial analysis of the original
proposals, Pillar 1 and Pillar 2 would increase the
effective average tax rate by around 0.7 percent
across all jurisdictions. Pillar 2, the global minimum
tax, is responsible for the majority of this increase,
accounting for 0.6 percent.
Pillar 2 Example
The company has $40 billion in annual revenues and
profits of $10 billion but faces a 10% effective tax rate.
The top-up from the global minimum tax amounts to 5%.
Pre-tax Profits
$10.00
Normal Tax Liability (10% tax rate)
$1.00
Top-up tax of 5% (based on minimum
tax rate of 15%)
$0.50
After-tax Profits (Profits minus Taxes)
$8.50
TaxEDU | 3
Pillar 2 also includes some carveouts. Companies
would be able to exclude 5 percent of the value of
their tangible assets (like buildings and machinery)
and 5 percent of their salaries and wages from the
minimum tax calculations.
Impact on U.S. & Foreign
Multinationals
The plan would impact U.S. and foreign
multinationals by:
• Limiting tax planning
•
Increasing effective tax rates on cross-
border investment
•
Increasing taxes on earnings in low-tax
jurisdictions
• Reshaping foreign direct investment (FDI)
•
Impacting where companies hire and invest
globally and domestically
• Slowing global economic growth
•
Introducing additional tax complexity
Further Reading
Below are some resources regarding the global
tax deal from Tax Foundation and other sources.
Please conduct additional research on the case
prior to discussion.
International community strikes a ground-
breaking tax deal for the digital age
Over 130 countries clinch a deal that could
radically reshape how companies are taxed
What’s in the New Global Tax Agreement?
What Do Global Minimum Tax Rules Mean for
Corporate Tax Policies?
BEPS Project Explanatory Statement
Reflect on the following questions:
• What is the problem(s)?
• How do these policies meet (or not meet) the Principles of Sound Tax Policy?
• What general options are available to develop more sound policy that targets the issue at hand?
• Who are the stakeholders and what are their interests?
• How and why did previous attempts to address profit shifting fall short?
What is the Global Tax Deal and what
impact will it have on U.S. and foreign
multinationals?
Global Taxation
Global taxes in this case study refer to taxes levied
on U.S. and foreign multinational companies.
These companies my be headquartered in one
country (and tax jurisdiction) but have operations
such as manufacturing or sales in other countries
and tax jurisdictions.
Some multinationals strategically place their
operations in a way that minimizes their tax
burden, or how much they owe in corporate
income taxes (CIT) to the countries they operate
in. Oftentimes, low-tax jurisdictions are part of
these strategies to minimize CIT liability. This is
what the term tax haven refers to.
The Base Erosion and Profit Shifting (BEPS)
project in 2015 and later Digital Services Tax
(DST) proposals which came on the scene in
2018 were attempts to change tax rules for
multinational corporations and address cross-
border tax avoidance.
Cross-border tax avoidance occurs when
multinational companies seek low-tax jurisdictions
or exploit mismatches between tax systems to
reduce their overall tax burden. Countries that
are reliant on the CIT suffer more from this type
of avoidance, and the issue can only be fully
addressed by countries working together to close
gaps in their tax codes and limit the use of tax
havens.
The OECD and G20 countries worked together
to adopt an action plan to combat BEPS, with a
focus on limiting the ability to avoid taxation. The
15-point plan also sought to avoid introducing
double taxation as a remedy to the tax avoidance.
DSTs were meant as temporary policies targeted
at large, digitalized business models. By targeting
the digital presence of a multinational tech
company instead of the location of its physical
offices (think streaming services, social media, or
online retailers), governments saw an opportunity
to catch lost global corporate income tax revenue
generated by companies that operate worldwide
but only technically owe taxes in a home country.
These tactics proved to fall short in targeting
global taxation and instead created new trade
conflicts.
In the last few years, the Organisation for
Economic Co-operation and Development (OECD)
has discussed a more permanent and effective
plan to change tax rules for large companies
and continue to limit targeted tax planning by
multinationals. This plan was broken into two
pillars: Pillar 1 is focused on changing where
companies pay taxes, and Pillar 2 would establish
a global minimum tax.
The OECD Global Tax Deal
In October 2021, more than 130 countries (over
90 percent of the global economy) agreed to set a
minimum global corporate tax rate of 15 percent
starting in 2023.
Case Study 4:
Global Tax Deal
TaxEDU | 2
The Global Tax Deal is a significant shift in
international tax rules. The OECD’s plan aims to
reduce incentives for tax planning and avoidance
by U.S. and foreign multinational companies by
limiting tax competition and changing where
companies pay taxes.
To achieve this, the proposal is divided into two
independent plans: Pillar 1 and Pillar 2.
Pillar 1
Pillar 1 would expand a country’s taxing power
to include a share of profits from companies
that make sales in the country regardless of a
company’s physical location. This would result
in some companies paying more taxes in the
countries where their customers or digital users
are, even if the company has no permanent local
establishment in that country.
For companies with global revenues of more than
€20 billion (US $26.4 billion) and profitability
above 10 percent, 25 percent of profits above
10 percent would be taxed according to a new
formula based on where a company’s customers
are located.
Pillar 1 would also include dispute resolution
processes meant to improve tax certainty for
companies.
Pillar 1 Example
The company has $40 billion in annual revenues and
profits of $10 billion (a profit margin of 25%). $1.5 billion
of its profits will be impacted by Pillar 1.
Total Profits
$10.00
Profits above 10% Profit Margin (in
excess of $4 billion)
$6.00
Pillar 1 Profits (25% of profits above a
10% Profit Margin)
$1.50
Pillar 2 – Global Minimum Tax
Pillar 2 of the Global Tax Deal would limit tax
competition and the so-called “race to the
bottom” on corporate tax rates. It would establish
a minimum percentage for effective tax rates
applied to cross-border investment by large
multinational corporations that have a “significant
economic footprint” across the world, or a global
minimum tax. The proposed global minimum tax is
15 percent.
Pillar 2 includes three rules that apply to
companies with more than €750 million ($991.9
million) in revenues.
•
Income inclusion rule: determines when
a company’s foreign income should be
included in the parent (main) company’s
taxable income.
• Under-taxed payments rule: allows a
country to reject a deduction on cross-
border payments to the parent company.
• Subject to tax rule: makes it possible for
countries to tax inter-company payments
that would be under-taxed.
According to initial analysis of the original
proposals, Pillar 1 and Pillar 2 would increase the
effective average tax rate by around 0.7 percent
across all jurisdictions. Pillar 2, the global minimum
tax, is responsible for the majority of this increase,
accounting for 0.6 percent.
Pillar 2 Example
The company has $40 billion in annual revenues and
profits of $10 billion but faces a 10% effective tax rate.
The top-up from the global minimum tax amounts to 5%.
Pre-tax Profits
$10.00
Normal Tax Liability (10% tax rate)
$1.00
Top-up tax of 5% (based on minimum
tax rate of 15%)
$0.50
After-tax Profits (Profits minus Taxes)
$8.50
TaxEDU | 3
Pillar 2 also includes some carveouts. Companies
would be able to exclude 5 percent of the value of
their tangible assets (like buildings and machinery)
and 5 percent of their salaries and wages from the
minimum tax calculations.
Impact on U.S. & Foreign
Multinationals
The plan would impact U.S. and foreign
multinationals by:
• Limiting tax planning
•
Increasing effective tax rates on cross-
border investment
•
Increasing taxes on earnings in low-tax
jurisdictions
• Reshaping foreign direct investment (FDI)
•
Impacting where companies hire and invest
globally and domestically
• Slowing global economic growth
•
Introducing additional tax complexity
Further Reading
Below are some resources regarding the global
tax deal from Tax Foundation and other sources.
Please conduct additional research on the case
prior to discussion.
International community strikes a ground-
breaking tax deal for the digital age
Over 130 countries clinch a deal that could
radically reshape how companies are taxed
What’s in the New Global Tax Agreement?
What Do Global Minimum Tax Rules Mean for
Corporate Tax Policies?
BEPS Project Explanatory Statement
Reflect on the following questions:
• What is the problem(s)?
• How do these policies meet (or not meet) the Principles of Sound Tax Policy?
• What general options are available to develop more sound policy that targets the issue at hand?
• Who are the stakeholders and what are their interests?
• How and why did previous attempts to address profit shifting fall short?