A Step towards Tax Justice for Multinational Companies

By Revanza Almaas, a Directorate General of Taxes officer

The world of international taxation has witnessed a great moment with over 140 countries joining to implement a innovational agreement, last January 2024.. This pact, pioneered by the Organization for Economic Cooperation and Development (OECD), aims to establish a minimum corporate tax rate of 15%, specifically targeting multinational corporations (MNCs), large businesses operating across international borders. This move is a significant step to create a more equitable and transparent global tax system.

Advantages of Global Minimum Tax

This agreement resolves two crucial issues that have bothered the international tax system for decades:

1. Profit Shifting: This refers to the practice employed by many MNCs to minimize their tax burden. They achieve this by shifting their profits, often generated in high-tax countries, to nations with significantly lower tax rates – often referred to as "tax havens." This practice allows them to avoid  paying their fair share of taxes in the countries where they generate their real income.

2. Unfair Tax Competition: The existence of tax havens offering exceptionally low tax rates creates an uneven playing field for businesses. It incentivizes MNCs to relocate their operations or shift profits to these havens, harming other countries due to tax revenue loss .

The OECD estimates that the newly established Global Minimum Tax (GMT) will significantly cut back the issue of under-taxed profits, potentially resulting in an 80% reduction. This can be achieved through a two approaches:

1. Minimum Tax Threshold: MNCs with annual earnings exceeding €750 million (approximately Rp12,8 trillion) will be subject to a mandatory minimum tax rate of 15%.
2. Top-Up Tax: If any country's tax rate falls below the 15% minimum, other countries where the MNC operates can impose a "top-up tax." This ensures that the effective tax rate applied to the corporation's overall profits reaches the minimum level, effectively closing the loopholes previously exploited through profit shifting.

An Important Step

The adoption of the GMT signifies a major step forward in fostering global cooperation, especially at the time when international relations are having increasing tensions. While some experts, like Lucas Chancel, believe the 15% minimum is just a starting point and encourage further reforms to address broader tax justice concerns, the GMT undoubtedly represents a positive step towards a more equitable and stable global tax system.

Furthermore, the success of the GMT demonstrates the potential for global cooperation to coexist and even develop with healthy competition. This agreement serves as a beacon of hope in the middle of the current trend toward inward-looking policies and rising fragmentation on the world stage. As we enter a year marked by pivotal elections in major economic players like the US, UK, and India, the future trajectory of global cooperation remains to be seen. However, the GMT stands as a prove of the potential and importance of international collaboration in addressing some of the most pressing challenges facing the world today.

Moreover, the implementation of the GMT has triggered discussions among economists and policymakers regarding its potential broader implications. Some argue that while the GMT is a step in the right direction, it may not go far enough to address systemic issues within the global tax framework. Questions arise about the effectiveness of a fixed minimum tax rate in an increasingly dynamic and complex global economy. Additionally, concerns persist about the practical challenges of enforcing the GMT across jurisdictions with varying tax laws and enforcement capabilities.

Unanimity and Commitment

Despite these uncertainties, the widespread support for the GMT reflects a growing consensus among countries on the need for coordinated action to fight tax evasion and ensure that multinational corporations contribute their fair share to the societies where they operate. The GMT represents a significant departure from the traditional approach of relying only on national tax policies and enforcement mechanisms. Instead, it shows a shift towards a more collaborative and integrated approach to international taxation, emphasizing the importance of multilateral cooperation in addressing global challenges.

Looking ahead, the successful implementation of the GMT will depend on continued commitment from participating countries to establish the principles of fairness, transparency, and accountability in the global tax system. It will need dialogue and coordination to address emerging issues and adapt to current economic realities. However, the collective action taken to establish the GMT shows the potential for international cooperation to achieve meaningful progress on complex and argumentative issues, offering hope for a more equitable and sustainable global economic order.

*) This article is the author's personal opinion and does not reflect the attitude of the agency where the author works.

The content on this page may be copied and reused for non-commercial purposes. However, we kindly request users to give credit to the source by providing a link back to the original page. Thank you for your cooperation.