Is the global minimum tax about to die on the vine? The proposed deal would introduce a uniform minimum tax rate on corporate profits. But it was stalled in both the United States and the European Union after Poland vetoed an EU agreement to implement the measure at the end of 2023.
The Poland vote was a continuation of a trend that’s starting to raise concern among proponents of the global minimum tax. Last summer, cracks began to emerge when the European Union announced it would seek a levy of a 0.3% tax on the goods and services sold online by all companies operating in the European Union with annual sales of at least 50 million euros ($53.7 million). That would be a huge barrier to a tax deal, particularly as the U.S. objected to the proposal on the basis that the tax would specifically target large U.S. e-commerce firms.
Meanwhile, outside of the G20, countries with existing tax rates lower than the proposed global level – like Ireland (12.5%) and Switzerland (8.5%) – have been consistently vocal about opposing the initiative. And in developing nations, particularly African countries where the economy is almost entirely based on the presence of foreign multinationals, the idea of losing their preferred tax status isn’t appealing.
Not to be deterred, Treasury Secretary Janet Yellen insists the U.S. is committed to seeing this effort through. In fact, she has gone so far as to say that she believes Congress could still approve elements of the deal and expects the EU will approve the minimum tax plan this spring. But the global tax faces challenges on the home front as well, most notably a crowded landscape of domestic issues – from student loan debt cancellation to sagging GDP growth to the Supreme Court’s impending action on Roe v. Wade. Does the White House have the political capital to make it happen on the Hill?
The never-ending global tax saga feels has caught CFOs and corporate tax teams in a cycle of uncertainty. Whether it’s preparing to account for specific carve-outs for industries – like those the U.K. is seeking for its financial services sector – or running through multiple forecasting scenarios to identify the most logical path forward, the constant state of flux has instilled a sense of "hurry up and wait" in many multinational tax departments.
There are companies that are trying to be proactive. Many multinationals have realized they have limited bandwidth to accommodate the kind of sweeping structural changes that would be required by the new regulation. They are contemplating making huge organizational changes to ensure they’ll be ready to stay compliant.
Is it really worth changing everything, from staffing up to altering supply chains, just in anticipation of an agreement that still faces significant hurdles before its ratified?
“Companies are starting to realize that their existing global structures and their supply chains and operating models might not be the most efficient structures and models in a post [global minimum tax] world,” Jason Yen, principal in EY’s international tax and transaction services group and a former U.S. delegate to the OECD, told CFO Dive. “This is coming as somewhat of a surprise and it’s not an easy thing to grapple with.”
Of course, therein lies the rub. Is it really worth changing everything, from staffing up to altering supply chains, just in anticipation of an agreement that still faces significant hurdles before its ratified? The more pertinent question: Can multinationals afford to roll the dice?
For corporate financial professionals, it is almost a moot point, because volatility exists either way. A multinational corporate tax strategy is an immensely complicated endeavor, one that factors a host of variables, including global trade requirements, location of customer base, location of talent, and corporate tax rates in an elaborate balancing act. Do corporate tax rates matter? Yes, absolutely, but it’s important to remember that they are part of a much larger strategic mix, one that will not change overnight.
Vigilance is the key. As this new law continues to remain up in the air, multinationals have to double down on scenario planning and develop action plans for each of their options. Provided a CFO is engaged with the regulatory landscape, aware they may have to pivot on a dime, and has the structural in place for organizational agility, their company should be fine, whether a global minimum tax comes to fruition or not.
Brian Peccarelli is co-chief operating officer of Thomson Reuters.