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The Global Minimum Tax, Explained

taxes, money
Introwiz on Deposit Photos

What is one thing that individuals and large businesses have in common? They both hate to pay taxes and will do everything in their power — hopefully, legally —to minimize what they owe. This goal is why many globally run businesses will choose to be based in the least taxed country, even with their executives, operations and customers still located in their country of origin. You will often see global companies establish a base in Ireland, the Netherlands or the Cayman Islands (like Binance). 

But on July 1, 2021, the secretary of the U.S. treasury, Janet Yellen, announced that 130 nations, which represent 90% of the global GDP, have agreed to participate in the global minimum tax (GMT).

What is the global minimum tax?

Spearheaded by the U.S., this new tax policy attempts to end the practice of businesses searching for countries with low taxes to move their headquarters. Yellen hasn’t announced a tax rate yet; however, the Biden administration is pushing for 15%. 

“For decades, the United States has participated in a self-defeating international tax competition, lowering our corporate tax rates only to watch other nations lower theirs in response.” 

Janet Yellen

What is the international community doing about it?

The G-20 finance ministers are set to meet later this month through the Organization for Economic Cooperation and Development (OECD) to further discuss the minimum global tax reform. There are two pillars of focus in these policies. The first focuses on digitalization and large international tech firms. Digital companies operate in a non-physical space, so it’s very difficult to determine where they should be taxed. So, this tax reform would reallocate taxes to where they do business and not where they are headquartered. And the second pillar focuses on the minimum tax rate that would lower competition, protecting countries’ tax bases.

Via Bloomberg

Considering that 130 countries have accepted the GMT, people are receiving this policy pretty favorably. Companies haven’t said much about the matter, but countries such as Ireland and Hungary — which have a tax jurisdiction below 15% — are not in favor of the GMT. It makes sense because low tax jurisdictions incentivize businesses to move to their countries. Businesses have no reason to move to a country if they raised taxes.

So what do you think? Should there be a global minimum tax? 

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