The global minimum tax, though short on details at this point, has its share of skeptics who foresee higher taxes and other economic hits from the scheme aimed at large multinationals that avoid paying taxes by shifting profits to tax-friendly countries.
As of July 9, 132 countries have agreed to the two-pillar approach of the Organisation for Economic Co-operation and Development (OECD) and G20 to try to ensure large multinational firms pay their fair share of taxes no matter where they do business and where their headquarters are located.
On a July 10 call with reporters from the G20 Finance Ministers and Central Bank Governors Meeting in Venice, Finance Minister Chrystia Freeland reiterated the objectives of the two pillars. Pillar one is about allocating taxing rights to countries where the world’s largest and most profitable multinational firms—including digital companies—do business, and pillar two introduces a global corporate minimum tax of at least 15 percent, she said.
“This is an opportunity for us to act together to end tax arbitrage and jurisdiction shopping by multinationals, to end the ‘race to the bottom,’ and to secure the tax base that we need to support our people,” Freeland said.
The tax agreement faces opposition in the U.S. Congress from Republicans. U.S. firms stand to be hit the hardest.
Canada, whose federal corporate tax rate is 26.5 percent, has not meaningfully lowered its corporate tax rate in the last 10 years like some other countries have, and Freeland said the deal “will level the playing field for Canadian workers and businesses in a global economy.”
However, a handful of countries are opposed to the agreement, including Ireland and Hungary, whose corporate tax rates are lower than 15 percent—at 12.5 percent and 9 percent respectively.
‘Global Tax Cartel’
Franco Terrazzano, federal director of the Canadian Taxpayers Federation, is leery of the agreement, saying that it will pave the way for higher taxes and for politicians to woo investors with more subsidies and special privileges instead of lowering taxes.
“A global tax cartel will mean an inevitable march toward higher tax bills and more pork for companies with access to politicians,” he said in a commentary in the Niagara Independent.
Governments want to “cartelize” the tax system so they can pile taxes on multinationals to finance spending, said Jack M. Mintz, President’s Fellow of the School of Public Policy at the University of Calgary, in a Financial Post op-ed.
In addition, Mintz said the global minimum tax would discourage foreign investment globally, since, for instance, a U.S. company investing in another country, such as Canada, would lose tax breaks like research and development tax credits that would be available to domestic Canadian companies.
And if a company ends up paying less tax in a foreign country, so that the effective rate paid is less than the global minimum, its own country would top up the tax and collect the difference between the foreign country’s rate and the global minimum rate.
“By accepting a global corporate tax, we would effectively be agreeing to a higher tax on foreign companies relative to domestic companies operating in Canada,” Mintz said.
The inverse situation would hurt Canadian companies investing in foreign countries that offer a lot of tax breaks, such as the United States, he said.
“Under the global minimum tax, Canadian companies wouldn’t be able to access the same tax breaks as domestic companies operating in foreign markets.”
He added that it’s not clear that a global minimum tax is in Canada’s best interest.
Details to Come
For now, the devil is in the details and it would probably be difficult for companies to start making concrete plans, Bruce Ball, VP of Taxation with the Chartered Professional Accountants of Canada, told The Epoch Times.
“For a minimum tax, the key issue is what’s the tax base, how’s it going to work exactly when you’re looking at a particular country. … The idea is that there shouldn’t be a lot of exemptions or credits,” Ball said, adding that factoring in provincial or state taxes is another issue.
Terrazzano said the global minimum tax would “strike a blow against tax competition,” which is what is keeping politicians from hiking taxes.
Some countries with effective tax rates lower than the minimum could raise their rates to capture a larger share of the taxes paid instead of having another country obtain that revenue by making the company in question top up taxes to get to the minimum, Ball said.
“Countries in general have to decide if they want to adjust their tax rate given the [minimum] 15 percent,” he said.
The Venice meeting was the next step following G7 meetings in London in June where the initial agreement on co-ordinated taxation was reached following work by the OECD. Countries that sign on to the agreement are aiming to finalize detailed implementation this fall.
In the interim, Canada will implement a digital services tax starting in 2022, until this co-ordinated multilateral approach—which has been Canada’s strong preference—comes into effect.