Global minimum corporate tax rate facts for kids
The global minimum corporate tax rate is like a worldwide agreement. It sets a lowest possible tax rate for big companies. Countries around the world agree to this rate. The main goal is to stop countries from competing to offer the lowest taxes. It also aims to prevent large companies from moving their profits to places with very low taxes. This way, companies pay their fair share of taxes.
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Global Tax Plan from OECD and G20
On October 8, 2021, 136 countries agreed to a plan. This plan was put forward by the OECD (Organisation for Economic Co-operation and Development). It set a 15% global minimum tax rate. This tax started in 2023 in some places. Only a few countries have not yet joined this agreement.
Many governments are now working to make this agreement into law. The European Union has already put this plan into action. It started in January 2024. Switzerland also needed to change its laws. They will likely adopt the new rules in 2024. The United States is still looking at how to make these changes.
Why This Tax Was Needed
Old tax rules were made a long time ago. They don't fit today's world. Now, many companies grow huge without needing physical offices everywhere. They also rely on ideas and data, not just factories. This new way of doing business made it easier for companies to avoid taxes. They would move their money to countries with very low taxes.
This led to a "race to the bottom." Countries would lower their taxes to attract big companies. This meant governments lost a lot of tax money. This money is needed for schools, roads, and hospitals. The new global tax aims to stop this race.
How the Tax Works
The global minimum tax uses a two-part system. This system helps update how big companies are taxed. Before, countries could only tax a company if it had a physical office there. The new rules change this.
Part One: Sharing Profits
Part One is about sharing profits. It applies to the biggest and most profitable companies. These are companies that earn more than €20 billion worldwide. They also need to make more than 10% profit. This amount might even drop to €10 billion later.
This part of the plan shares some of these companies' extra profits. It sends them to the countries where their customers are. This happens even if the company doesn't have a physical office there. About 20-30% of their extra profits will be shared. This means countries will get a fairer share of taxes. More than $125 billion in profits could be taxed this way each year.
Part Two: The 15% Minimum Tax
Part Two brings in the new 15% global minimum tax. It applies to large international groups of companies. These groups must earn more than €750 million. This part of the plan is expected to bring in an extra $150 billion in taxes each year.
It deals with how parent companies and their smaller companies (subsidiaries) are taxed. If a subsidiary pays very low taxes, the parent company must pay a "top-up tax." This tax makes sure the total tax rate reaches 15%. So, companies can no longer pay almost no taxes in places known as tax havens. This part of the plan has three main rules: the Income Inclusion Rule (IIR), the Undertaxed Payments Rule (UTPR), and the Subject to Tax Rule (STTR). Together, the IIR and UTPR are called GloBE rules.
Income Inclusion Rule (IIR)
The IIR is the main rule. It means the parent company's home country collects the top-up tax. This rule makes sure that the whole group of companies pays at least 15% tax. It doesn't matter where each part of the company is located. This prevents companies from being taxed too much or too little.
Undertaxed Payments Rule (UTPR)
The UTPR acts as a backup. It is used if the IIR doesn't work. For example, if the parent company is in a country with very low taxes. Or if that country hasn't put the IIR into action. In these cases, other countries where the company has offices can collect the top-up tax.
Subject to Tax Rule (STTR)
The STTR is the third rule in Part Two. It's a special rule that lets countries tax certain payments. These payments might otherwise be taxed too low. The STTR tax rate would be between 7.5% and 9%. If a country doesn't tax certain payments enough, the country that made the payment can collect an extra tax. These payments include things like interest, royalties, or rent between related companies.
The STTR is different from the IIR and UTPR in a few ways:
- The STTR can apply to companies of any size. The €750 million limit might not apply.
- The STTR only applies to specific types of payments between related companies.
- The STTR applies to each payment separately. It's not a general tax on all income.
Both Part One and Part Two are big changes for international tax rules. Countries are working to make these new rules part of their laws.
What Happens to Low-Tax Countries
If countries with very low corporate taxes do nothing, they might lose tax money. This money could go to another country instead. For example, if a parent company is in a low-tax country that hasn't adopted the IIR. Then, another country in the company's chain might collect the top-up tax. The low-tax country would lose out on that money.
Countries with low or no corporate taxes have a few choices:
- They can keep things as they are. But this is unlikely for countries that agreed to the OECD plan.
- They can raise their corporate tax rate to 15%.
- They can have different tax rules. The 15% minimum tax would only apply to big companies.
Because of this, places known as tax havens will have less reason to offer very low tax rates. They will likely have to raise their main corporate tax rates. This will make them less appealing to large international companies.
UN Tax Convention
Some African countries felt the OECD-led tax plan was mainly for rich countries. They argued that global tax rules should be decided at the United Nations (UN) level. This is how climate and development goals are set. A group of over 130 developing countries, called the G77, agreed. In 2023, the UN economic and finance committee voted to create a UN tax agreement.
History of the Global Tax Idea
In 1992, a minimum corporate tax was suggested for countries in the European Union. A group of experts proposed a 30% minimum tax. However, this idea was not put into action.
OECD/G20 Agreement in 2021
In 2019, the OECD started suggesting a global minimum corporate tax rate. They said that digital services were growing fast. This meant tax rules needed to change. It would stop companies from moving profits to low-tax places. The OECD formed a group called the Inclusive Framework. This group explored a minimum tax rate for its member countries.
In May 2019, Germany and France proposed a plan. They called it Pillar Two. Their goal was to stop the "race to the bottom" in taxes. Olaf Scholz, then Germany's Finance Minister, said fair company taxes were a top goal. He said if the OECD couldn't agree, the EU would act alone. This idea from France and Germany got a lot of support. The heads of the International Monetary Fund and the OECD supported it too.
In 2020, 137 countries in the group called the Pillar Two plan "a strong base." They said it would fix problems with companies avoiding taxes. The United States joined these talks in 2020. In April 2021, Janet Yellen, the US Treasury Secretary, agreed with the plan.
In June 2021, finance ministers from the Group of Seven (G7) countries met. They supported a global minimum corporate tax rate of at least 15%. This would apply to the 100 largest international companies. It was meant to stop countries from lowering taxes to attract these companies. French Finance Minister Bruno Le Maire said 15% was just a start. He said it could be raised later. Janet Yellen said the agreement was good for the world economy. She said it made things fair and encouraged good competition. China's Finance Minister, Liu Kun, said in 2021 that the plan would create a "fair and lasting" international tax system.
On July 1, 2021, 130 countries supported the OECD's plan.
On October 8, 2021, three EU countries agreed to the plan. They were Republic of Ireland, Hungary, and Estonia. They agreed as long as the 15% tax rate would not be raised. This agreement is called the Statement on a Two-Pillar Solution. A total of 137 countries have approved it. Each country's parliament must approve it for it to become law.
Putting the Plan into Action
As of July 2022, the UK and Japan had started drafting rules. Most other countries had not yet begun to put the agreement into action.
On February 2, 2023, the OECD released detailed guides. These guides help countries put the global minimum tax into practice. They explain how to deal with different tax situations. This guidance helps countries work together to apply the rules. It also addresses questions from companies.
A report in June 2023 said the deal was at risk. This was due to political disagreements in the US.
In July 2023, 138 countries agreed to move forward. They planned to sign a main agreement that year. This agreement is expected to start in 2025. The STTR rules will be open for signing in October 2023.
How Switzerland Is Doing It
Switzerland is putting the OECD minimum tax into action. They did this by changing their constitution. People voted on this change on June 18, 2023. This vote gave the government power to start the new tax. After six years, the government must ask Parliament to approve a new law.
Only a small number of companies in Switzerland will be directly affected. About 99% of companies will not be affected. They will continue to pay taxes as before. It's hard to know the full money impact. But at first, the extra tax money is expected to be about CHF 1 billion to CHF 2.5 billion each year. This is about 1.2 to 2.8 billion US dollars. About 75% of this money will go to the areas (cantons) where big companies used to pay lower taxes. The main government gets the other 25%.
On December 22, 2023, Switzerland decided to start the global minimum tax on January 1, 2024.
When Countries Will Start
| Implementation | |||
|---|---|---|---|
| Part One | Part Two | ||
| Country | Date | Date | Note |
 Australia |
1 January 2024 | ||
 Austria |
1 January 2024 | ||
 Belgium |
31 December 2023 | ||
 Bulgaria |
1 January 2024 | ||
 Canada |
31 December 2023 | ||
 Croatia |
31 December 2023 | ||
 Cyprus |
31 December 2023 | ||
 Czech Republic |
31 December 2023 | ||
 Denmark |
31 December 2023 | ||
 Finland |
31 December 2023 | ||
 France |
31 December 2023 | ||
 Germany |
31 December 2023 | ||
 Hungary |
1 January 2024 | ||
 Ireland |
31 December 2023 | ||
 Italy |
31 December 2023 | ||
 Japan |
1 April 2024 | ||
 Liechtenstein |
1 January 2024 | ||
 Luxembourg |
31 December 2023 | ||
 Malaysia |
1 January 2025 | ||
 Netherlands |
31 December 2023 | ||
 Norway |
31 December 2023 | ||
 Romania |
31 December 2023 | ||
 Singapore |
1 January 2025 | ||
 Slovakia |
31 December 2023 (partial) |
||
 Slovenia |
31 December 2023 | ||
 South Korea |
1 January 2024 | ||
 Sweden |
31 December 2023 | ||
 Switzerland |
31 December 2023 (partial) |
||
 United Kingdom |
31 December 2023 | ||
UN Tax Convention
In 2023, after many years of requests from African countries, the UN General Assembly voted. They decided to create a UN tax agreement. It is called the UN Framework Convention on International Tax Cooperation.
Global Taxes vs. Digital Taxes
This global minimum tax deal also aims to prevent trade disagreements over digital taxes. Some European countries had already put in place a digital services tax (DST). This tax applied to the money big digital companies made from online services. These DSTs are different in each country. For example, Austria and Hungary only tax money from online ads. France also taxes money from digital platforms and user data for ads. These tax rates are between 1.5% and 7.5%.
After the global minimum tax deal, leaders said they want to remove all digital services taxes. This is to avoid taxing companies twice. However, Canada and the European Union still want their own digital taxes. This makes the situation tricky. It's also a sensitive issue for politics. The United States has had problems with digital taxes. This is because most big digital companies are American. The US doesn't want these companies to be unfairly targeted.
See also
- Tax competition, which can lead to countries lowering taxes to attract businesses
- List of countries by tax rates for how corporate tax rates compare around the world
- Corporate haven, a country with very low tax rates for companies
- World taxation system
- International taxation
