How Will The New Globalized 15% Tax Rate Impact Offshore Companies

Following the new agreement on a global minimum tax rate in efforts to prevent large companies from shifting their profits to offshore jurisdictions, what will the future hold for stand alone companies?

The Group of 7 (G7), which includes Britain, Canada, France, Germany, Italy, Japan, and the United States, reached a compromise on setting up a minimum 15 percent global tax rate on companies wherever they do business, discouraging businesses to move their operation offshore.

The new tax agreement has left companies concerned about the impacts this will impose. However, it is important to note that while this agreement does make it harder to use tax havens to push down tax burdens where companies are headquartered, with an additional tax now having to be paid by companies based on where their goods or services are sold, even if they don’t have a physical presence in that nation, this agreement only applies to multinational companies and for the current times, does not impact smaller, standalone companies.

For peace of mind, it is imperative to further unpack the medium and long-term future held for companies. While the new tax is mainly aimed at big corporations (GAFA), the agreement is ongoing with final resolution yet to be achieved. For now, concerned companies troubled about possible effects can avoid negative impacts should they not be a large business with a profit margin of at least 10 percent applied to at least 20 percent of profit exceeding that 10 percent margin.

On the brighter side, smaller companies should rest easy knowing that, for now, only positive impacts will be experienced. The agreement, after all, encourages countries to compete on corporation tax rates to attract multinational businesses and helps create a level playing field among companies. Furthermore, the agreement promotes a unique approach that embodies sound tax policy objectives, and allows businesses to deliver predictable and time-sensitive dispute prevention and resolution, and with this certainty.

According to thefactcoalition.org, “Small business owners often find themselves in competition with multinational corporations”... Multinational companies around the world use provisions in the tax code to shift profits and avoid paying taxes that they would otherwise be required to pay. The effective tax rates of many of the largest companies are far lower than what is paid by millions of smaller entrepreneurs. The high levels of tax avoidance by large corporations, estimated in the hundreds of billions of dollars in annual losses globally, harms small business competitiveness — increasing the risks to the larger business environment in which we operate. Small businesses are often the ones asked to pick up the tab to pay for the lost revenue to balance budgets or cover the costs of public services. If taxes are not collected, a lack of adequate revenue can lead to rising public debt, which then impacts our members’ ability to access capital or face deteriorating services that harm the ability of small businesses to attract customers.

And while smaller companies are not included in the agreement, news reports reveal that developing countries have demanded that the scope of the planned 15% tax agreement be extended to include smaller global businesses which use tax havens. Should demands include smaller countries, and more countries, and all within our jurisdiction, be met and the details of the agreement changed, all companies will be impacted. We however see this as unlikely. As a new agreement, and a starting point, the upcoming months are yet to reveal further positive or negative impacts.

Should you find yourself in need of further clarity or assurance regarding how the new globalized 15% tax rate will impact offshore companies, and your company, get in touch with your SFM team today.