Global Minimum Tax Policy

The G-20 nations announced a proposal for a global minimum wage. This is steeped in the need to ensure that the rich and powerful corporations pay a fair share of their taxes and avoid abusing tax loopholes.


Image Source: Business Insider


Driving Factors


The use of tax havens makes taxes appear to be optional. Many high-worth individuals and corporations can easily keep money they earn offshore away from tax rules and avoid paying taxes anywhere in the world.


On the other hand, the lack of proper tax regimes to seal these loopholes imply that the tax purse becomes burdened and a few middle-class individuals bear a disproportionately high tax burden. Therefore, to ensure the survival of the global economy, the G-20 nations seek to create a common minimum tax policy that will be compulsory for anyone who wants to thrive in these countries or related countries.


Some of the biggest tech companies pay almost no taxes because they set up their operations in countries like Ireland where they get tax incentives. These tech companies make billions of dollars in trade but pay almost nothing. Hence, the global minimum tax will force them to pay some taxes to be allowed to operate in the countries under review.


How will the Global Minimum Tax Work?


It will be a tax base that will be imposed on earnings in all the countries within the group. This will be a standard that would be unavoidable by people in these advanced developed countries and once it becomes apparent, the minimum tax will be imposed without any possibility of avoiding it.


According to the model proposed, governments will set national tax rates. If a person or organization pays less tax anywhere in the world, the global minimum tax will be imposed on their operations. This way, no one can escape taxes and there will be a tax for global affairs.


If a company or person refuses to pay the global minimum tax for their global income, they will have to stop operating. This will provide a solution to the high incidence of companies escaping taxes and keeping their funds and revenues offshore.


What will the Global Minimum Wage Rate be?


While the G20 nations were able to agree on setting a global minimum tax rate in principle, they have not been able to set a specific rate. Different leaders have different standards and expectations.


The previous level that was proposed was 12.5% which was seen to be too low. However, it was seen as a good level to start such a novel tax policy of that nature. Hence, the wait-and-see approach could be used to understand the way such a change would affect the people and how this can be promoted.


On the other hand, leaders like Joe Biden seek a 21% minimum tax for the proposed global minimum tax. This was criticized for being too high for the start. This is also seen to be too high for countries that seek to set competitive tax standards to attract investors.


Strategic Implications


A global minimum tax regime is in the pipeline and with the US president’s support, it is likely to be passed. The current timeline indicate that it will come into effect in 2023. This means companies will have to spend time evaluating the implications of such taxes on their revenue portfolio and tax avoidance mechanisms. This is particularly relevant if a company relies on an international tax haven to gain tax advantages.


In spite of this, the process might take some time to be established in totality. This requires a lot of commitment from different leaders. There are also significant parties and interest groups that will work against its implementation. Therefore, some leeway would be expected before a global tax regime can be instituted and implemented universally.


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