New chapter to open on international taxation

Minimum 15% corporate levy due to take effect in 2023

A deal on establishing a global minimum tax rate for large multinational companies will open a new chapter in meeting challenges resulting from globalization and digitalization of the world economy, according to analysts.

At the end of October, leaders of the 20 biggest economies endorsed at the G20 Rome Summit an Organization for Economic Cooperation and Development deal on setting a global minimum corporate tax of 15 percent.

A Reuters report, quoting the draft conclusions for the deal, said the aim is for the new taxation rules to take effect globally in 2023.

Earlier, 136 countries and jurisdictions comprising 94 percent of global GDP reached agreement on an inclusive framework to make it harder for leading corporations to avoid paying tax by establishing special purpose entities in low-tax locations. The minimum corporate tax rate of 15 percent will apply to multinationals with annual revenue of more than 750 million euros (about $845 million).

Qiang Jianxin, head of the School of Economics and Finance at the University of International Relations in Beijing, said the current international tax system was established about 100 years ago with the aim of avoiding double taxation of enterprises by multiple tax jurisdictions and preventing international tax avoidance and evasion.

However, digitalization has brought new forms of business and new business models, which get round current international tax rules.

Qiang said that under these rules, a multinational pays taxes to the country in which its profits are earned. However, in the digital economy, some companies make profits online without setting up operational entities. As a result, profits can be reallocated across borders and companies can make profits in locations where they have no physical presence, such as a headquarters. This could cause a mismatch of earnings and taxes, and trigger an imbalance in the allocation of tax benefits among economies.

Moreover, to deepen economic globalization, economies have taken various measures to attract investment from international companies, triggering a race to the bottom on international tax rates and a quick decline in global corporate income tax rates, he said.

A race to the bottom refers to a competitive situation where a company, state or nation attempts to undercut the competition's prices by sacrificing quality standards or worker safety (often defying regulation), or reducing labor costs. Such a race can also occur among regions.

According to the OECD, under the current tax system, governments lose $100 billion to $240 billion in tax revenue a year.

Zhang Wenchun, a researcher at the International Monetary Institute of Renmin University of China, said that in addition to the increasing financial pressures on many countries, a race to the bottom causes distortions in tax incentives for investment and loss of investment efficiency.

"In today's economy, multinationals can make huge profits from intangibles such as trademarks and other intellectual property, which is much easier than relocating a plant. Companies can distribute the earnings they generate to subsidiaries in countries with very low tax rates. Some nations use minimum tax rates to attract companies so that they can generate substantial revenue even at tax rates that are just above zero," Zhang said.