Navigating the Minimum Global Corporate Tax Rules
- Geoffrey James Cole
- Jan 8, 2023
- 3 min read
Updated: Jan 20
Effective December 31st, 2023, the Global Anti-Base Erosion Model Rules (GloBE) took effect across more than 130 different nations worldwide. As we enter 2025, 90% of in-scope multinationals will be affected by Pillar Two minimum tax requirements.
What are the GloBE rules and BEPS?
In October 2021, 130 nations came together and agreed that a global minimum corporate tax was necessary to ensure multinational enterprises (MNEs) were paying their fair share of taxes with respect to the jurisdictions in which they operate. This is what now comprises the proposed GloBE rules set to take effect December 31st. Today, MNEs are able to exploit mismatches in tax codes across countries, in what is called Base Erosion and Profit Shifting (BEPS). These actions allow a company to declare lower profits in high tax (often developing) countries while shifting profits to low tax countries where they benefit most.
"The OECD estimated that up to 240 billion USD in tax revenue is lost annually worldwide because of this practice."
The agreement is designed to address the disproportionate and growing amount of revenues generated by digitalization and cross-border services utilized by MNEs. As such, GloBE rules are broken down into two core pillars:
Pillar One focuses on establishing where companies pay taxes.
Pillar Two focuses on establishing a global minimum corporate tax and mechanism for enforcement.
Pillar One
As previously mentioned, this portion of the proposal assists in establishing where a company must pay taxes. Previously, if a company did not have a physical location established in the country where it had sales, it may have impacted whether or not the company had tax liability there. To be in scope (and thus a ‘Covered Group’), the MNE will need to exceed revenues of 20 billion Euros and have profitability exceeding 10%.
More information on Pillar One can be found on the OECD's Amount A Factsheet.
Pillar Two and "Topping Up"
Arguably the most important pillar for businesses to recognize, Pillar Two establishes how much tax MNEs should be paying and establishes mechanisms to enforce this. The pillar establishes a minimum effective tax rate of 15% for MNEs who earn more than 750 million Euros per year, based on an analysis of two out of four preceding years.
It would typically be very difficult to get 130+ countries to all agree on a global minimum corporate tax, particularly where the tax may slow investment in historically low-tax countries. Under the proposal, countries are allowed to raise taxes against a MNE if the effective tax rate would be lower than 15% based on other jurisdictions. The enforcement mechanism is what's known as "Topping Up." Because of this, many countries were onboard with the idea so they did not miss out on their share of tax revenues. Learn more about Pillar Two and its proposed implementation.
Looking Forward
While GloBE rules will limit tax planning for large MNEs, the good news is that, due to revenue requirements and international sales requirements, most businesses will not fall under their scope. Nations with higher than average tax rates will benefit as jobs are consolidated from overseas and the growing tax revenues become used for infrastructure at home. All in all, implementing the GloBE rules moves businesses closer to tax certainty and reduces the number of unknowns for investors as they continue to expand.
