Global minimum tax in the world: which countries have already joined?

On 14 December 2022, after much discussion, Council Directive (EU) 2022/2523 was adopted on ensuring a worldwide minimum level of taxation of multinational enterprise groups and large domestic groups in the EU. In the specified article, we will consider the main provisions adopted by the specified EU legislative act and the consequences that the adopted Directive causes.

Global Minimum Tax: What is it?

The EU directive in clause 15 of Art. 3 introduced the so-called minimum tax rate of 15%, which is determined by the G20 BEPS countries and the Inclusive Group of the OECD based on the balance between fixed corporate tax rates worldwide.

Suppose the effective tax rate of the TNC group falls below the minimum tax rate (15%). In that case, the additional tax must be distributed among the enterprises of the TNC group to meet the globally agreed minimum effective rate of 15%.

The main goal of the introduction of the minimum global tax regime is to minimize the opportunities for multinational companies to use the so-called aggressive tax planning followed by tax evasion by transferring the profits to countries (territories) with a lower tax burden, even if the income was generated in another country.

In addition, according to OECD data calculated in January 2024 on expected tax revenues due to the introduction of the global minimum tax, it is estimated that the implementation of the outlined tax policy will bring 155-192 billion US dollars worldwide annually, or from 6.5% up to 8.1% of global income.

Who is covered by the “global minimum tax” policy?

The “global minimum tax” regime will apply to any multinational corporation with a combined income of more than 750 million euros, regardless of where such a company carries out its economic activities. That is, we are talking, first of all, about the so-called global business, which generates the lion’s share of global profits and carries out activities with the involvement of its own foreign branches.

How does it work?

The global minimum tax rate will be calculated as an effective rate and not as a nominal statutory rate. For example, in Estonia, companies pay corporate tax only on distributed profits at a rate of 20%, which will increase to 22% from January 1, 2025 (we discussed this in detail in the article). In other words, no income tax is charged on retained earnings or reinvested earnings. Thus, in periods when the company does not pay dividends or distributes relatively tiny profits, the effective tax rate is likely to fall short of the required minimum of 15%.

So, if a subsidiary in Estonia made a profit of €50,000 and distributed €25,000, its tax liability in Estonia would be €6,250. That is, the effective tax rate is 12.5%. Given the introduction of the “global minimum tax” regime, the country where the parent company is located must apply an additional tax of 2.5% to obtain the required 15%.

Which organizations are not subject to the “global minimum tax” regime?

According to the Directive, the global minimum tax regime does not apply to public institutions, international or non-profit organizations, pension and investment funds that are the parent organizations of a transnational group. This is because the entities outlined above usually have tax benefits by way of exemption from paying taxes on their profits to achieve the purposes for which they are created and function.

It is important to note that the considered global corporate tax reform will not apply to small and medium-sized companies but will be used exclusively to multinational corporations with an annual turnover of more than 750 million euros/year. That is, small businesses will still pay corporate taxes at current rates.

Which countries have joined the implementation of the global minimum tax policy?

Today, almost 140 countries, which account for more than 90% of the world GDP, have joined the implementation of the reform of the international tax system, which indicates a clear and consolidated approach of most countries of the world to minimizing cases of aggressive tax planning. At the same time, such a tax reform’s implementation varies.

For example, in the United Kingdom, a “global minimum tax” regime was introduced under the Finance Act (No. 2) 2023, which will come into force for accounting periods beginning on or after 31 December 2023. Meanwhile, the Estonian authorities postponed the implementation of the updated policy until 2030.

Thus, summarizing the above, we can conclude that within the limits of today’s realities, the optimization of the tax burden becomes quite limited. Currently, it is primarily about limiting tax planning options for multinational corporations. However, considering the existing trends, we do not exclude the application of similar reforms to small and medium-sized enterprises. For individual tax advice, you can contact the lawyers of Azola Legal Services.