Alicia Nicholls and Tammi Pilgrim
The finance ministers of the seven richest democracies in the world (the Group of Seven or G7) have committed to a global minimum corporate income tax (CIT) rate of “at least 15%”. This decision has been hailed in principle as a “guide” to ensure that large multinational corporations (MNCs) pay their “fair share” of taxes. While the details of the proposed tax are still unknown, the decision, if implemented, could potentially have non-negligible effects on tax-free or low-taxed countries around the world. This article provides an initial reflection on what this development could potentially mean for the International Financial Centers (IFCs) of the Caribbean.
What does a global minimum CIT include?
The global minimum CIT would require a company from a country that introduces this floor (the “home country”) to pay tax on its profits at that particular rate, even if those profits are declared abroad, e.g. B. in a country with lower taxes. It works as a top-up tax where the company’s home country (Country A) could collect the difference between the tax rate the company paid in the lower tax jurisdiction (Country B). This undermines any benefit of relocating to a lower tax area.
The idea of a global minimum CIT is not new. The introduction of common global minimum tax rules is currently part of Pillar 2 of the Organization for Economic Cooperation and Development (OECD) ‘s Base Erosion and Profit Shifting (BEPS) initiative, which aims to prevent companies from exploiting gaps and mismatches in countries’ tax systems Avoid taxes.
Why is this suggested?
Basically, this worldwide minimum CIT is intended to discourage multinational corporations from shifting profits to countries with low CIT rates in order to avoid paying the higher CIT imposed by their home countries. This inevitably leads to lower tax revenues for the home country.
The OECD argues that “BEPS practices cost countries US $ 100-240 billion in lost revenue annually, which is 4-10% of global corporate tax revenues.” Large countries, particularly some high-tax European countries like France and Germany, blame this tax competition for the erosion of their tax bases and point to the higher rates paid by small businesses and ordinary taxpayers. However, very little is said about the tax laws of these large countries, which generally allow this “injustice” by allowing companies to exploit various tax loopholes. It also ignores the principle of law advocated by many common law jurisdictions, which allows taxpayers to regulate their affairs lawfully in order to minimize tax liability.
As part of the massive tax reform of the Trump administration under the Tax Cuts and Jobs Act of 2017, the statutory CIT rate in the USA was reduced from one of the highest in the world at 35% to a medium range (21%). However, the Biden administration first attempted to raise the legal CIT rate to 28% to fund its ambitious $ 2 trillion infrastructure plan to stimulate the US economy. Hence, the introduction of a global minimum CIT gained momentum again in April 2021 when US Treasury Secretary Janet Yellen called for such a 21% tax.
This “call to action” was enthusiastically received by many European countries, the Organization for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF). Perhaps unsurprisingly, the Republic of Ireland, which has a CIT rate of 12.5% and is home to the European headquarters of US tech giants Apple, Facebook, and Google, hasn’t gotten a similarly enthusiastic response.
How does this affect Caribbean IFCs?
Many countries, including Caribbean IFCs, have traditionally attracted foreign direct investment, thanks in part to lower CIT rates. Among the Caribbean IFCs, there are tax-free jurisdictions such as the Bahamas and the UK Overseas Territories of the Cayman Islands, British Virgin Islands (BVI) and Bermuda that do not levy personal or corporate tax. Then there are “low tax” areas like Barbados, whose CIT rate (1-5.5%) is now the lowest in the world.
These countries are now at risk of losing this business and related benefits as the global minimum CIT could be a deterrent for businesses to stay in low / no tax countries. Although empirical data is limited, the global or international corporate sector is an important source of foreign exchange and direct employment in the Caribbean, but also offers spill-over benefits through skill transfer, corporate rental income, and is an important source of income for corporate services. Corporate tax revenue from the global corporate sector, for example, makes up the lion’s share of Barbados’ CIT revenue and has proven resilient even in the face of the COVID-19 pandemic. Any negative impact on the global corporate sector at this point could cause even greater economic devastation in the fragile economies of these countries.
Aside from the potential loss of business and tax revenue, Caribbean IFCs can also face significant international pressure (including reputational damage) to adhere to the global norm. Although the ability to collect taxes is a sovereign right stemming from statehood, the Caribbean IFCs could not inappropriately fear being exposed to tactics such as blacklisting or denying deductions on income falling into a jurisdiction that has not adopted the minimum CIT.
For example, Barbados lowered its CIT rate from 30% to its current low rate in response to OECD allegations of earmarking, as international business companies (now abolished) would then enjoy a lower CIT rate than domestic companies. Barbados has also enacted significant economic substance laws that require businesses to demonstrate that they carry out their main income-generating activities in the countries where they declare profits. This has made it even more difficult for jurisdictions to compete for investment based on tax rate alone.
Finally, Caribbean IFCs following these developments may find it increasingly necessary to turn to alternative methods in order to increase their investment attractiveness. A look at Invest Barbados’ Why Barbados page reveals that Barbados is increasingly basing its value proposition on non-tax factors, including promoting substantial businesses, its human resources, lifestyle and its network of tax treaties
The Barbados response to this latest initiative is aimed at attracting more companies to their headquarters here, where they would be taxed as Barbados companies. As Barbados government adviser Professor Avinash Persaud said at a recent business forum, “America and the UK might decide to set a global minimum tax rate … they can decide how to tax a Barbadian subsidiary of a UK company, but they can’t determine how they tax a Barbados based company. So we have to bring these companies to Barbados to do real business in Barbados and have their headquarters here. “
What happens next?
The fundamental commitment of the G7 states to a global minimum CIT is an important decision, but not yet a fait accompli. Talks in the Group of 20 (G20) and the OECD will continue with the aim of reaching a consensus by July. The fact that the phrase “at least 15%” is used in the G7 communiqué, however, suggests that there may be disagreement among proponents as to whether the rate should actually be 15% or even higher. There are of course other questions that still need to be clarified, such as which companies this tax would apply to.
Further disagreements have come to light since the announcement of the G7. The City of London (UK), as well as Hungary and Poland, have announced their intention to seek spin-offs (below the global CIT minimum) for financial services companies or income from the essential activity of a company in a jurisdiction. Such exemptions may be necessary to reach international consensus.
The issues raised by the introduction of a global minimum tax rate are complex. They bring the tensions between the competing needs of one home country (to retain tax revenue) and those of another country (to attract foreign direct investment) into focus, mostly with the common goal of promoting their own development and their respective economic and economic goals to achieve social goals. Undoubtedly, the question of whether MNCs pay their “fair share” of taxes needs to be addressed multilaterally. However, this discussion should probably take place in a forum like the United Nations, in which all countries of the world – large and small, industrialized and developing countries – sit around the table, in order to avoid the impression that rich countries set the rules and their wills change and movable goal posts based on their own narrow political interests and economic needs.
Furthermore, as all too often, it is the little ones – the little IFCs – who are likely to bear the brunt of the economic fallout in trying to hunt the “big fish”. The IFCs in the Caribbean should therefore develop strategies to best combat this recent onslaught. One possibility could be to join forces internationally with other similarly positioned IFCs, to object to this proposal and to request a seat at the table. As Barbados is currently doing, they will also need to put in place alternative strategies to attract investment if this latest proposal wins “global” approval.
Alicia NichollsTammi pilgrim
Alicia Nicholls is an international trade advisor and founder of www.caribbeantradelaw.com. Tammi C. Pilgrim is a lawyer specializing in the settlement of commercial disputes through arbitration, litigation and mediation. She is lead arbitration partner with Lex Caribbean, Barbados, and is admitted to the bar in Barbados, St. Lucia, New York and St. Kitts and Nevis. The views expressed in this article are solely those of the authors and do not necessarily represent the views of any companies with which they may be affiliated.
Support local journalism. Subscribe to the All-Access Pass for the Cayman Compass.