US Companies Get Temporary Relief from Global Minimum Tax

On Monday, July 17th, countries around the world agreed to updated administrative guidance from the Organization for Economic Co-operation and Development (OECD). This new guidance allows countries that have implemented the new global minimum corporate tax (GMCT) additional time to prepare, providing temporary relief for American companies.

Background

Over the past few decades, technological improvements have made it increasingly easy for corporations to avoid paying taxes by moving to low-tax jurisdictions. The result, sometimes referred to as a “race to the bottom,” has been a serious loss of tax revenue in higher-tax countries as corporations seek out jurisdictions with lower tax rates. In response, 140 countries, including the United States, have agreed to a new tax for multinational corporations based on a two-pillar system.

Pillar One expands the authority of countries to tax profits from companies that make sales into their country but don’t have nexus (a physical location) there.

Pillar Two introduces the undertaxed profits rule (UTPR), a new global minimum corporate tax of 15% on multinational groups with revenue exceeding EUR 750 million. Essentially, it allows countries to add an extra “top-up tax” that ensures that multinational corporations are subject to a minimum 15% tax regardless of where they are headquartered. It is predicted that this will generate around US$150 billion in additional tax revenues annually.

The “Transitional Safe Harbor”

In response to concerns that businesses would find it difficult to implement the new reporting processes in time to comply with the new rules, the OECD has instituted a safe harbor transition period. This transition period applies to fiscal years beginning on or before December 31, 2025, and ending before December 31, 2026. During the transition period, corporations in countries with a corporate tax rate of at least 20% will not be subject to the top-up tax until 2026 provided they meet certain conditions. This includes companies in the United States, which has a corporate tax rate of 21%

This transition period, short as it is, is designed to ensure that the safe harbor serves as a disincentive to countries to adopt Global Anti-Base Erosion Model (GloBE) rules or as an incentive to go to a jurisdiction that has not yet adopted the global minimum tax or go into a jurisdiction with lower effective tax rates—for example, Luxembourg, which has a 10% tax rate.

What Can You Do?

The safe harbor transition period was designed to give companies time to adjust to the new regulations. We strongly recommend that multinational firms take advantage of the time to prepare for the upcoming changes. Our international tax experts are here to help. Contact us today.

Contact us at Tonneson + Co today to learn how we can help.