Taxation of multinationals is in the spotlight. The G-7 agreement to set a minimum corporate tax of “at least 15%” among the countries of the bloc represents a before and after in the negotiations on the reform of international tax rules: it is the first time that a group countries agree on a common framework to tax large corporations more. A minimum corporate tax, however, already exists in several countries, although under different formulas. “The introduction of a minimum tax is associated with an increase in the average effective rate,” says an article published on Tuesday by the economists of the International Monetary Fund (IMF) Aqib Aslam and Maria Coelho.
In 2018, 52 countries contemplated some type of minimum tax on companies, including the US – a measure introduced with Donald Trump’s 2017 tax reform -, Canada, India, Italy, Argentina, Algeria or Chad. Spain also proposed introducing a 15% floor, a measure that will be analyzed by the committee of experts for tax reform.
“The idea of a minimum rate is not a novelty. At the local level, countries have been using modern forms of minimum taxation since at least the 1960s, ”the article notes. “The objective is to prevent the erosion of the tax bases caused by the excessive use” of tax advantages: credits, deductions, exemptions or bonuses that lower the base on which the tax is calculated. “By setting a minimum rate for companies, governments guarantee a floor in the contribution of companies to the public purse”, continues the text.
Generally, these taxes are calculated from a “simplified tax base.” In most cases, turnover is taken into account – it is the most common formula, especially in countries with high legal fees. There are also schemes based on assets or on adjusted corporate income where the number of deductions and exemptions allowed is “explicitly limited”. These latter taxes provide the largest increases in effective rates, followed by those based on assets and turnover. But the impact on collection also depends on the rate applied. The two IMF economists have calculated the effect of a minimum tax of 0.5% on turnover and 1% on total assets for an average economy. The first would contribute seven additional percentage points of collection, and the second almost a third more.
The article recognizes that the agreement reached in the G-7 supposes “a new impulse for the revision of the international fiscal norms”, but considers that the use of local minimum taxes could increase, since they offer a simpler option especially for the low-income countries: “Despite the inefficiencies associated with local minimum taxes, they can allow countries to earn significant income.”
“Establishing a floor for corporate taxes, at least at the local internal level with moderate tax rates, can be a good option for countries that seek to preserve income and avoid the erosion of their tax bases,” conclude Aslam and Coelho. On the other hand, they warn that, even if a global minimum rate is set, it is possible that tax advantages will continue to proliferate to attract large companies: “But the value of these incentives will decrease.”