139 countries of the planet have agreed on a minimum rate for the income of large transnational corporations - it will be 15%. This is part of a global crackdown on corporate tax evasion. Never before have such initiatives found such widespread support.
What changes do corporations expect?
A fifteen percent minimum tax will apply to companies achieving a global turnover of 750 million euros or more. If the country in which the income is earned applies lower tax rates, corporations will have to pay the underpayment in their countries of incorporation. That is, a company registered in the Netherlands, which received profit abroad and paid tax on it, for example, 10%, will pay the remaining 5% to the Dutch budget. It should be noted that there are 3000 such corporations in the Netherlands, and the country’s government expects to receive an additional 466 million euros per year to the budget.
What is the reason for introducing new rules?
Multinational corporations have long planned their operations so that their profit-generating units are located in countries with low or no income taxes. In fact, they took advantage of a legal loophole to evade taxes.
Countries with low taxes received payments to the budget from income to which they actually had nothing to do. Developed countries, on the contrary, were deprived of income. The principle “Raise taxes, or we will do it for you”, which is the basis of the international agreement, is already bearing its first fruits. The United Arab Emirates is introducing a corporate income tax for the first time. Bermuda, considered a classic tax haven, is also considering introducing a 15% corporate income tax.
This means that companies have less incentive to shift profits to low-tax countries, and countries are no longer interested in attracting business with low taxes. Since other countries are allowed to increase their corporate tax to 15%, countries with rates below this lose government revenue. The implementation of the new rules around the world is expected to generate about $220 billion in new tax revenue.
What do the critics say?
Critics of the agreement say it does little to benefit developing countries, and they are right about that. Low-tax jurisdictions will not be able to generate revenue from activities they are not involved in. The new rules will require additional tax administration: for example, 65 new officials will be hired in the Netherlands. Some developing countries cannot afford such expenses.
States with large economies will benefit the most from the new rules. From the point of view of residents of developed countries such as the Netherlands, this is quite fair.
However, corporations also operate and make profits in jurisdictions where their income taxes are higher than the minimum. Now international companies will have to spend additional resources on administration, and incur costs to collect and organize the data necessary to demonstrate compliance with requirements. Presumably, these costs will be passed on to the end consumers of goods and services.
When do the new rules come into effect?
The global minimum tax will take effect on January 1, 2024. Dutch tax authorities will begin processing the first tax returns for 2024 in mid-2025.
To be sure that tax reporting is completed correctly, we advise legal entities order accounting services, and for private individuals file tax returns via Nalog.nl.
Publication Date: 15.09.2023
