How a 15 percent global minimum corporate tax would work
Earlier this month, G7 finance ministers agreed to push for a global minimum corporate tax of 15%. If governments formalize it, the deal could underpin a global treaty with other major economies. This article explains how a 15 percent global minimum corporate tax would work, based on public statements to date. It is not tax or investment advice.
Why a global minimum corporate tax?
The stated goal is to end what US Treasury Secretary Janet Yellen described as a 30-year race for corporate tax relief. In practice, major economies want to discourage multinational companies from cutting their tax bills by shifting profits to low-tax jurisdictions. For example, some jurisdictions tax income from patents, software, and royalties at very low rates, sometimes near zero. However, supporters and critics still debate how much revenue a minimum tax would actually recover.
How a 15 percent global minimum corporate tax would work
Under the proposal, the minimum tax would apply to profits that multinationals earn abroad. Each country would remain free to set its own local corporate tax rate. However, if foreign profits face a rate below the minimum, the home country may collect a top-up tax. As a result, the combined rate could rise to the global minimum.
Last month, the OECD said governments had broadly agreed on the design of the framework but not on the rate. Meanwhile, the G7 talks gained momentum around a 15% level. Nevertheless, some tax experts say agreeing on the rate may be the hardest part of the process.
In addition, negotiators still need to settle other items. For instance, they must decide how the tax would treat investment funds and real estate investment trusts (REITs).
A simple hypothetical illustration
Consider a hypothetical example to see the mechanism. Suppose a multinational books foreign profits in a jurisdiction that taxes them at 5%. That rate sits 10 percentage points below the proposed 15% minimum. As a result, the home country could collect a top-up tax on those profits. The combined rate would then reach roughly 15%, although the final rules could change the exact calculation.
In other words, the minimum would not force any country to raise its own rate. Instead, it would reduce the benefit of reporting profits where rates are lowest. Of course, the real effect would depend on details that negotiators have not yet published.
What is next?
Next month’s G20 meeting may show how much support the agreement has among other major economies.
First, governments must still set the metrics that determine how the tax applies and which multinationals it covers. Next, the G7 statement left one question open. It did not specify how the deal would treat digital services taxes on large technology companies.
Where low-tax jurisdictions fit
In our view, adopting this agreement could significantly affect low-tax jurisdictions, including some that critics call tax havens. Ireland, for example, has seen significant economic growth, partly from investment by multinational companies. Therefore, we believe some of these jurisdictions may not support the agreement in its current form. However, positions may shift as talks continue. Finally, any account of how a 15 percent global minimum corporate tax would work remains provisional for now.
Key signals to watch
Readers following the talks may want to track a few signals. First, watch whether the G20 backs the 15% level next month. Next, look for detail on which multinationals the rules would cover and how the metrics would work. In addition, note any decision on investment funds and REITs. Readers should also watch for any decision on digital services taxes. Finally, watch how low-tax jurisdictions respond, because their support could shape any global treaty.
For now, the framework remains a proposal rather than law. Therefore, companies and investors should treat any estimate of its impact with caution.
