New Global Profits Tax for 2024

140 countries have agreed from 1st January 2024, to apply an effective tax rate of at least 15 per cent on corporate profits.

The OECD estimates it will increase annual tax revenue by as much as $220bn worldwide. It is a major policy to address profit shifting.

The new rules will apply to multinational companies (MNCs) with an annual turnover of more than €750mn.

Some economists argue that the law of intended consequences will kick in with competition between countries through grants or subsidies.

Ireland is a country that will be affected. Ireland collected record corporation tax in 2023. The Irish government is setting up a sovereign wealth fund with the tax windfall.

More here from the Guardian on tax avoidance

The concept of a Global Profits Tax (GPT), also known as a global minimum corporate tax rate, has been a subject of intense debate in recent years. While not formally implemented yet, a landmark agreement reached in 2021 under the auspices of the Organisation for Economic Co-operation and Development (OECD) lays the groundwork for its potential creation. This essay seeks to provide an academic explanation of this emerging policy proposal, exploring its key features, potential benefits and drawbacks, and the complexities surrounding its implementation.

Key Features:

• Global Minimum Rate: The core element of the GPT is the establishment of a global minimum corporate tax rate, currently proposed at 15%. This aims to prevent multinational corporations (MNCs) from shifting profits to low-tax jurisdictions to minimize their tax burden.
• Pillar One & Pillar Two: The OECD agreement adopts a two-pillar approach. Pillar One seeks to reallocate some taxing rights over the profits of large, highly profitable MNCs to jurisdictions where their users and markets are located, particularly in the digital economy. Pillar Two implements the global minimum rate,ensuring MNCs pay at least 15% on their global profits, even if they operate in low-tax havens.
• Scope & Exceptions: The GPT applies to multinational enterprises (MNEs) exceeding a certain global revenue threshold, currently proposed at €750 million. Exemptions exist for certain industries and activities.

Potential Benefits:

• Fairness & Revenue Generation: Proponents argue the GPT promotes tax fairness by preventing MNCs from exploiting loopholes and encourages responsible corporate behavior. It also has the potential to generate significant additional tax revenue for governments globally, estimated at around US$150 billion annually.
• Reduced Tax Competition: The GPT could dampen the race to the bottom in corporate tax rates among countries, creating a more stable and predictable tax environment for businesses.
• Addressing Challenges of Digital Economy: Pillar One specifically targets the taxation of digital businesses,addressing concerns about their ability to avoid taxes through low-tax jurisdictions.

Potential Drawbacks:

• Complexity & Implementation Challenges: The GPT raises complex technical and administrative challenges, requiring detailed international cooperation and coordination to implement effectively.
• Impact on Developing Countries: Some argue the GPT could disproportionately disadvantage developing countries, potentially limiting their ability to attract foreign investment and compete in the global marketplace.
• Potential Distortions & Negative Economic Impact: Concerns exist that the GPT could distort business decisions and investment patterns, potentially impacting economic growth and job creation.