International Tax Reform the C-Suite Can’t Ignore
For decades, nations competed to attract businesses with tax breaks. A new agreement among OECD countries is about to change that.
By the end of this year, the global tax system will experience a historic shift that will have implications for multinational enterprises (MNEs) that go far beyond their tax departments. The upcoming regulatory changes will impose significant compliance burdens on MNEs and should prompt C-suites to reconsider whether their global operating models remain fit for purpose.
For decades, countries have competed intensely to attract MNEs’ operations by cutting their corporate tax rates and narrowing their tax base. But this competition is about to change significantly, now that 138 jurisdictions, representing nearly 95% of the global gross domestic product, have reached an agreement to put a floor on global tax competition. The agreement — part of an initiative led by G-20 countries and the Organization for Economic Cooperation and Development (OECD) — requires that all large MNEs be subject to a minimum tax of 15% in each foreign country in which they operate. Key jurisdictions, including all members of the European Union, are expected to apply the new rules in 2024.
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A Brief History of Global Corporate Taxation
The new tax agreement represents a watershed moment for global business regulation. To understand how we got here, consider that the average corporate income tax rate among the high-income countries that the OECD comprised in 1980 was 47%, and that average had declined to 23% in 2021. The Obama and Biden administrations, among other governments around the world, have referred to this decline as a “race to the bottom,” whereas other policy experts assert that the decrease is the result of healthy competition fueled by tax policy.
The new tax agreement represents a watershed moment for global business regulation.
In addition to the downward trend in corporate tax rates, the complexity of taxing cross-border income, combined with some countries’ intentional efforts to attract mobile income (meaning income that can easily be shifted to low-tax jurisdictions, such as the returns on intangible property and intercompany financing), have long meant that some MNEs’ profits could legally escape taxation altogether or be taxed only very lightly. Companies have long used complex tax structures with funny names, such as the “double Irish” and the “Dutch sandwich,” to exploit differences in countries’ characterizations of payments and entities to create stateless income. This has fed a perception among some lawmakers and the public, especially in Europe, that MNEs have been