The changing landscape of international tax

In October the G7 agreed, in principle, a new minimum global tax framework with more than 130 countries signing up.

The aim of this framework is to help tackle tax avoidance, particularly of large multinationals (with a global turnover in excess of €750m) using offshore tax ‘havens’, by imposing that they pay, at least, the 15% tax rate on profits arising in each country in which they operate. The EU have already begun the process of introducing a Directive to implement the minimum rate of tax. The UK Government have recently published a consultation, seeking views on the application of the global minimum tax in the UK, including who the rules apply to, transition rules, and how firms within scope should report and pay.

With the corporation tax rate increasing here to 25%, for larger businesses, from 1 April 2023, the consultation includes how the UK Government might introduce additional reforms, alongside the global minimum tax, to maximise their collection of tax revenues.

Perhaps the economic impact of the new framework will be felt more acutely in countries with a corporation tax rate of below 15%.  The Republic of Ireland currently enjoy a corporation tax rate of 12.5%, so these new rules should undoubtedly see an increase in tax bills from 1 Jan 2023 for multinational companies operating there. Due to the quantum of inward investment, there is likely to be little impact on the Irish economy, as the infrastructure and skills already exist in these established businesses. However, it does raise the question on how Northern Ireland can compete with a tax rate that is at least 10% higher?

The G7 lead framework is now the latest official benchmark for the worldwide tax landscape, with some jurisdictions planning ahead and introducing changes already.  The United Arab Emirates (UAE), who previously did not have a corporation tax regime, announced in January, that from June 2023, a federal-level corporate tax will be introduced at a standard rate of 9%. It is expected that the corporation tax will apply to all UAE businesses and commercial activities alike, with the 15% global minimum tax for multinationals also being adopted.

The UAE is, of course, not the only country without a corporate tax base. Closer to home, we have Guernsey, Jersey, and the Isle of Man applying 0% rates to the majority of companies who are tax resident in their jurisdictions.  With all three signing up to the global minimum tax rate for multinationals, the question arises as to whether countries such as these will also increase their base corporation tax rates.

There is a long road to go with the minimum global tax framework, and a lot of details regarding its implementation still to be agreed, however it is already clear that changes are on the horizon and as such larger groups are assessing their impact.