Global minimum tax: should smaller countries opt in or out?

October 2023  |  FEATURE | CORPORATE TAX

Financier Worldwide Magazine

October 2023 Issue

The global minimum tax agreement is a hotly debated topic within international tax policy. With 137 countries having signed the agreement thus far, uptake appears amenable. But for some countries, the decision whether to opt in or out is rather more complex.

Originally proposed by the Organisation for Economic Co-operation and Development (OECD), the global minimum tax agreement imposes a minimum tax of 15 percent on large companies – which the OECD estimates will contribute more than $150bn in tax revenue worldwide.

However, despite the significant number of signatories to the agreement, for smaller countries such as Kenya, Nigeria, Pakistan and Sri Lanka (only 23 African countries are among the 137 countries and jurisdictions that have agreed), the decision to implement the global deal is far from easy, with many resistant due to myriad scenarios – both positive and negative.

Indeed, smaller countries that sign the agreement may benefit from increased tax revenue that circulates back into their own economies, levelling the playing field with larger countries and facilitating greater international cooperation. However, countries that opt out of signing remain more attractive to large corporations seeking low tax rates, also positively impacting their economies.

“Smaller countries are struggling with the global minimum tax rules in two ways,” says Daniel Bunn, president and chief executive of the Tax Foundation. “First, they often have very few staff available for implementing the rules package and participating in training or other coordinating efforts to ensure the local rules match the globally agreed rules.

“Second, many small jurisdictions have a multitude of tax preferences that allow companies to reduce their effective tax rates,” he continues. “The countries are navigating questions about the viability of those programmes and possible reforms while also determining if they should adopt the global rules.”

Somewhat more critical and suggesting a measure of fiscal hypocrisy is at work is Gary Clyde Hufbauer, a non-resident senior fellow at the Peterson Institute for International Economics. “On the one hand, the US and Europe are providing massive subsidies to favoured industries, such as semiconductors, electric vehicles, green infrastructure and more,” he contends. “On the other hand, they are urging the rest of the world to forgo low tax rates as a means of attracting global corporations. Small countries that are in no position to subsidise business firms should think twice about subscribing to the global minimum tax system.”

In or out

So, with the decision to opt in or out of the agreement seemingly fraught with danger, the world’s smaller countries in particular need to weigh up the potential advantages and disadvantages of a global minimum tax.

“The first thing these countries should consider is competitiveness,” asserts Mr Bunn. “There will continue to be opportunities to attract cross-border investment to their jurisdictions. If low tax rates are no longer part of the toolkit, then they should ensure that even if a company pays a 15 percent effective tax rate in their jurisdiction, that they are competitive on compliance costs – limiting complexities and uncertainties anywhere they can.

“Adopting the global minimum tax rules could lead to higher revenues and more consistency with larger jurisdictions, but in some cases the revenue will not be worth the work to implement and administer the rules,” he continues. “Policymakers should be performing analysis to understand the tradeoffs that are particular to their jurisdiction.”

In the view of Mr Hufbauer, small countries with favourable natural conditions such as minerals, select agricultural products and fine beaches, may well be able to tax the economic rents enjoyed by firms in those industries. “But small countries that have nothing to offer beyond willing and trained workers may well need to entice global firms with simple and low taxes,” he adds.

Polarising venture

With the impact of global minimum tax not as clear-cut for smaller countries, uptake is likely to remain low for the foreseeable future as the decision is taken whether to opt into the new international tax policy.

“For smaller jurisdictions that stand to raise substantial revenue through the new rules, I expect take-up will progress over the next few years,” says Mr Bunn. “These will likely be smaller jurisdictions that are home to multinationals or host significant amounts of foreign direct investment from multinationals. Smaller jurisdictions that are less exposed to investment from large multinationals will be less likely to move quickly to adopt the rules and may never actually implement them.”

Concurring to an extent is Mr Hufbauer. “I expect many small countries to either opt out of the global minimum or to sign with their fingers crossed – and then figure out alternative ways of conferring benefits on global firms,” he says.

Whatever the real or perceived benefits of signing on the dotted line for large and small countries alike, universal adoption of the global minimum tax is likely to remain a polarising venture.

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BY

Fraser Tennant