International business is bracing itself for a new global corporation tax that will see companies being taxed at the same minimum flat-rate wherever they’re based.
The idea will be floated by US president Joe Biden at the next G7 meeting and has the backing of some European leaders such as Germany’s Angela Merkel. It’s in response to large multinationals basing their headquarters in low-tax locations in order to pay only a fraction of the tax that would normally be owed. For instance, Amazon paid just £293m of tax in Britain in 2019 despite the company collecting UK sales of $17.5bn that year. And Microsoft's Irish subsidiary has just been revealed to have paid zero corporate tax on a £220bn profit. But how will a new corporate tax rate affect smaller businesses?
In what seems like a long-overdue move, the proposed minimum tax rate – which is estimated at having a floor of 15% but could go higher - would level the playing field for responsible local tax-paying SME owners who are usually at a disadvantage by being undercut by large multinationals. The move is seen as a way to wipe out the advantages of multinationals who shift their profits to tax havens, leaving smaller businesses to fill the tax gap.
There are various issues to finalise. One idea is that the global minimum tax rate would only apply to a company’s overseas profits and as long as this minimum rate was agreed, governments may then be able to set their own local corporate tax rate. If companies pay lower rates in a particular country, their home governments could make them top-up their taxes to the agreed minimum rate.
Updating complicated international tax rules will require the backing firstly of the other G7 countries - Canada, France, Germany, Italy, Japan, and the UK – and then the other countries in the G20. But with billions of pounds in tax that can be recouped and banked in their coffers on the back of such a tax, it seems highly unlikely that leaders will resist the move.
However, Ireland, that plays host to many multinational headquarters due to their very low corporate tax rate of just 12.5% (Google, HP, Apple, IBM, Facebook, Linkedin, Twitter and Pfizer to name a few) will be protesting a higher flat-rate figure in case it sees the big names leave their Irish shores. Cyprus, which has the same 12.5% tax rate and is a popular tax haven for businesses, is also looking to block the move due to the impact on them being able to attract future business to the country.
Other locations that could also see a dip in business if the minimum rate were to be set higher than 15% include the following, due to their low tax rate (in brackets):
- Hungary (9%)
- Montenegro (9%)
- Andorra (10%)
- Bosnia and Herzegovina (10%)
- Bulgaria (10%)
- Gibraltar (10%)
- Macedonia (10%)
- Moldova (12%)
- Liechtenstein (12.5%)
- Albania (15%)
But for smaller businesses there could be some advantages. Global SME owners might see it as an opportunity to scope out new markets abroad if every country has the same minimum rate of global corporate tax. There is also the possibility of differing tax rates being set for smaller international businesses that don’t bring in the big bucks compared to the large multinationals.
Whatever happens, the fact that some governments around the world will be billions of pounds better off, may mean some countries’ tax offices might not be as pressured to milk self-employed people and SME owners in quite the same way if they can automatically generate large amounts of cash from the bigger companies with a simple minimum tax rate.
We’ll keep you posted on all the latest news on corporate tax, but in the meantime if you’re interested in looking to new territories for your business, we can help you open in over 30 countries worldwide with a registered business address, a business bank account and accountant advice. You can download our free guides below, call our team on 0033 (0)1 53 57 49 10 or email us from our contact page and we’ll be happy to help.