The Cayman Islands. Bermuda. Monaco. The Bahamas.
Each of these countries is synonymous with one thing: tax. Or, more specifically, a lack of tax.
Aptly referred to as ‘tax havens’, these offshore nations provide little to no tax liability, meaning businesses and individuals can lower the amount of tax they pay significantly and without obligation to share any financial information with foreign tax authorities. Such financial privacy means there’s often speculation around the legitimacy of many offshore investments.
Generally, it’s only the largest businesses with the highest turnovers that have access to the offshore tax rates, perpetuating the divide between the ‘haves’ and the ‘have-nots’. To name a few: Google, Facebook, Microsoft, Apple, Nike, and Starbucks all shift their profits out of their revenue markets and into low-tax jurisdictions.
What’s been proposed?
In an attempt to tackle the imbalance, two noteworthy initiatives have been proposed. The first aims to end ‘profit shifting’ to tax havens by taxing company profits based on the country in which the revenue was generated rather than where its offshore headquarters are located.
The Biden administration has indicated that about 100 multinationals would be within this first pillar’s scope — half of which are US-based companies.
The second pillar will set a minimum global tax rate of at least 15% — a lower figure than the 21% proposed by President Joe Biden earlier in 2021. This reform is expected to capture roughly 8,000 multinational companies, including Amazon, Facebook, BP, Shell, BT, HSBC, Barclays, and Santander.
What effect will it have?
If it comes to pass, the US’ plans for global minimum taxation on corporate profits could unsettle those corporations with high overseas revenue and low tax bills. These reforms have been introduced not only to ensure large multinational businesses pay their fair share of tax but also to alleviate the strain on public finances. Last October, the Organization for Economic Co-operation and Development (OECD) estimated that as much as $81 billion could be raised each year under the reforms based on just a 12.5% minimum tax rate.
It’s anticipated, however, that economies such as Ireland could lose out on up to €2 billion annually. Other nations with low tax rates will also feel the effects the most, including Hungary, Canada, Hong Kong, and Singapore.
What does the future look like?
With an open-for-negotiation clause of ‘at least’ 15% minimum tax, some economies are in talks about bumping this figure up in the future.
What’s more, the plan for a minimum rate in the US still needs to pass through Congress. Given the 50-50 Republican-Democrat split, it’s unlikely to be an easy fight for the Biden administration.
Biden’s tax plan will target the bigger US corporations rather than putting additional pressure on smaller businesses. In fact, the president has provided assurances that the proposal will protect farms and family-owned businesses and create a more stable policy environment for smaller companies.
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