The impact on countries with tax systems and programs to attract multinational corporations will be negative, while their neighbors could benefit
In a landmark decision, the G-7 organization, which includes seven of the world’s largest economies, agreed on Saturday to work towards an international tax reform that provides for a global minimum corporate tax rate of 15%. The reform aims to ensure that large multinational corporations cannot minimize taxation on their revenues by setting up operating centers in countries with low corporate taxes, often just to pull such businesses.
The reform, first proposed by the US, also includes a commitment to “find a fair solution to the allocation of taxation rights,” according to a statement published by the organization. The statement said that market countries will be able to tax “the largest and most profitable multinationals” with at least 20% of any profit that exceeds a 10% margin.
These companies would include Amazon and Facebook, US Treasury Secretary Janet Yellen confirmed to reporters after the G-7 meeting in the UK.
Yellen tweeted after the meeting that G-7 finance ministers “today made a significant, unprecedented commitment that will provide tremendous impetus to achieving a robust global minimum tax of at least 15%. This global minimum tax would end the race to the bottom in corporate taxation and ensure fairness for the middle class and working population in the US and around the world. “
The G7 finance ministers today made a significant, unprecedented commitment that provides a huge boost to the achievement of a robust global minimum tax of at least 15%.
– Secretary Janet Yellen (@SecYellen) June 5, 2021
There are several countries in the Middle East that are taking advantage of tax breaks to encourage international companies to do business within their borders. For example, the United Arab Emirates corporate tax rate is 0%.
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Dr. Ibrahim Saif, Senior Fellow at the Middle East Institute, Jordan’s former Minister of Energy and Natural Resources and an expert on regional economies, told The Media Line that the impact of the reform on economies in the Middle East “depends on the current situation.” and the tax factor that exists now. ”Saif says Jordan and Egypt are examples of countries that currently have a corporate tax rate of more than 15%,“ so with very, very few exceptions this would have no impact on these industries ” . However, GCC states like Bahrain and the United Arab Emirates with no corporate taxation will definitely be negatively impacted, at least initially, says Saif.
Dr. Yossi Mann, a professor at Bar Ilan University and an expert on economies in the region, told The Media Line, referring specifically to the Persian Gulf, “If there’s one country that’s going to be affected, it’s the United States United Arab Emirates. On the other hand, I think there are countries that will benefit from it, especially Saudi Arabia. ”Mann explains that many companies operating in the Gulf – with the Saudi – to the chagrin of their neighbors. As the small business center loses its competitive advantage due to the tax reform, many will relocate their regional headquarters to neighboring Saudi Arabia, he predicts.
If they can manage to absorb and digest this new corporate tax in the long run, it would create a more sustainable source of income for the government and another source of income
Another Middle Eastern economy with close ties to the global marketplace, Israel has a “preferred company” policy whereby companies can enjoy a corporate tax rate of only 6% if they meet certain conditions. The country’s economy is also likely to be affected by the reform. The Israeli financial newspaper Calcalist reported, citing a local analyst, that this could force the government to improve its services, develop the necessary infrastructure and otherwise work to maintain its attractiveness for multinational companies.
This is not just true of Israel. While the immediate impact on countries like the United Arab Emirates is likely to be negative, over time the reform could push them to take measures that would be beneficial to their economies in the long term. Regarding the Gulf, Saif says, “If they can manage to absorb and digest this new corporate tax in the long run, it would create a more sustainable flow of revenue and a different source of income for the government.” He also points out that the countries will be forced to compete by improving their efficiency and the productivity they can promise businesses. If the governments in these countries manage to properly implement the necessary political changes, “that could … create more balanced relationships between business and government in these countries,” said Saif.
Mann says this reform may be in line with efforts by the Gulf states to create “healthier” economies. “I think these countries really want to drive significant change, and that’s why the issue of taxation is not that critical. On the contrary, I think they want to appear economically sound to the world, not just tax havens, and “in tune with the world for big corporations to come to them”.