International tax law is facing a major shake-up with the introduction of a global minimum tax on corporate income. International companies need to sit up and take notice.
This far-reaching reform of international tax law, which will mainly affect corporations that operate internationally, seeks to establish a global minimum tax rate of 15 percent with the aim of discouraging corporations from shifting their profits abroad as a means of avoiding tax, explains commercial law firm and international tax specialist MTR Legal Rechtsanwälte.
It was around two years ago, back in July of 2021, that the G20 finance ministers approved a reform to international company taxation. Since then, Germany’s Federal Ministry of Finance has taken steps to implement the reform by bringing a draft bill before parliament on July 10, 2023. The new framework rest on two pillars.
The first of these is primarily concerned with the taxation of large digital companies that operate internationally. They are to pay taxes in the country where their users are actually located, i.e., the country where the profits are generated. Previously, these companies only had to pay taxes in the country where their operational headquarters were located. Going forward, the plan is for taxation rights to be reallocated from the country of residence to market jurisdictions where the companies generate profits without having to be physically present. This measure supersedes the need to introduce digital taxes at the national level.
The second pillar introduces a global minimum rate of tax, essentially establishing a worldwide floor for the taxation of corporate income, which will be subject to further taxation in the event that a country undercuts the minimum threshold. The system is expected to ensure a greater degree of fairness in international tax law and prevent profits from being shifted to low-tax jurisdictions.
A total of 138 countries have signed up to reform international company taxation through the OECD by implementing an effective minimum tax rate of 15 percent. This will apply to international companies with a turnover of more than 750 million euros. The related EU directive is supposed to be transposed into member states’ national legal systems by the end of 2023.
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