The global community continues to work toward a guaranteed tax rate for multinational companies.
Strategies to reduce or eliminate taxes for companies that operate globally have been in play for years. In the past decade, Big Tech, Finance, and Pharma have become stand-out examples for critics of businesses who establish their headquarters and subsidiaries offshore to manipulate their tax rate.
As we have discussed in the past, the use of these strategies by Amazon, Apple, and many other companies effectively reduces corporate tax burden as it starves countries of needed tax income. For several years, discussions around regulation of multinational companies have advanced and faltered. With 130 countries now backing a draft framework for global regulation of these companies, the possibility of a standard tax rate is looming large in the window.
The framework is sprawling, but essentially means that companies will pay taxes to countries where their products or services are sold—regardless of whether the company has a physical presence in the country or region. Previously, a company might locate its headquarters in Ireland, which is known for its friendly corporate tax philosophies. The company would then pay rock-bottom taxes in Ireland, while at the same time earning big money from consumers living in other countries.
A tax rate of at least 15 percent could effectively end the use of foreign jurisdictions like Ireland, and Luxembourg, and many others, as a sole strategy for tax avoidance. With a corporate tax rate of 12.5 percent, Ireland is one of the countries that has, so far, refused to sign the agreement. Hungary and Estonia have also remained out of the agreement.
Still ahead, the tax reform plan is on target for final approval in October 2021, after which the measure will need legislative approval from the countries who are opting into the agreement. Closer to home, the tax package is expected to meet fierce opposition from Republican legislators in the U.S.
In a bid to sweeten the deal for the U.S., the EU agreed to pause its own initiative to apply a levy upon online sales. The side measure was considered a threat to tax reform in the U.S.
While gaining approval from participating countries will not be easy or fast, gaining tentative agreement on a tax rate and structure that benefits every country that does business with multinationals is a very big deal.
Speak with an experienced tax attorney in Cleveland about foreign bank accounts, offshore interests, or tax controversy
The experienced tax lawyers at Robert J. Fedor, Esq., LLC provide strategic solutions to complicated tax problems for businesses and individual clients around the world. When you need focused advice or if you have received correspondence from the IRS—contact us or call 800-579-0997.