Finance leaders of the world’s seven largest economies (G7) came to an agreement over the weekend that aims to change that. The agreement seeks to establish a global minimum tax rate of 15%. Companies would pay this amount no matter where their headquarters were located.
Why Global Minimum?
Major economies are aiming to discourage multinationals from shifting profits — and tax revenues — to low-tax countries regardless of where their sales are made.
Increasingly, income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to these jurisdictions, allowing companies to avoid paying higher taxes in their traditional home countries.
With its proposal for a minimum 15% tax rate, the Biden administration hopes to reduce such tax base erosion without putting American firms at a financial disadvantage, allowing competition in innovation, infrastructure and other attributes.
How Would a Global Minimum Tax Work?
The global minimum tax rate would apply to overseas profits.
Governments could still set whatever local corporate tax rate they want, but if companies payed lower rates in a particular country, their home governments could “top-up” their taxes to the minimum rate, eliminating the advantage of shifting profits.
The imposition of the global minimum tax would have a significant impact on the use of tax incentives.
- The global minimum tax would neutralize the low tax incentive.
- The global minimum tax may result in tax revenues effectively being exported to other jurisdictions such as offshores.
Inevitably, the global minimum tax would put pressure on those countries who have headline rates below the global minimum to increase their domestic rates. If not doing so, they would effectively export tax revenues.
What is Next?
A G20 meeting scheduled for the next month in Venice will show whether the G7 accord gets broad support from the world’s biggest developing countries.
The G7 communique left open what will happen in the meantime to digital services taxes on big technology companies in various jurisdictions, which the United States wanted to be scrapped as soon as the agreement was in place.
It said only that there should be “appropriate coordination between the application of the new international tax rules and the removal of all digital services taxes”.
Any final agreement could have major repercussions for low-tax countries and tax havens.
Corporate income tax rate in Serbia is among the lowest in Europe, it is currently set at 15% and you can legally avoid paying dividend tax if you include your endowment into ownership structure.
Feel free to contact us for more information about tax incentives for a company in Serbia.