News headlines tout the growing number of countries that have agreed to a global minimum tax rate. At present, 136 countries, which accounts for over 90% of the global economy, have agreed to a 15% minimum tax rate for corporations. What is this tax? Who’s subject to it? What does it mean for small businesses?
What is the global tax?
The global minimum tax is a way to prevent large multinational corporations from shifting their profits to low-tax countries, such as Ireland (12.5% corporate rate) and Switzerland (8.5% corporate rate). Until now, this has been done by setting up subsidiaries in these tax havens. By maintaining a minimum tax rate of 15% in the vast majority of countries, there is virtually no place remaining (other than Kenya, Nigeria, Pakistan and Sri Lanka, which have not yet agreed to the rate) to shift profits to—particularly from intangibles (patents, trademarks, software, royalties on intangibles). Those who support the tax expect it will boost the global economy and incentivize multinationals to keep more profits—and the tax on them—at home.
As it stands now, the tax would only apply to large multinational corporations. This means corporations with profits outside their borders exceeding $868 million. It would not impact the tax rate charged by the corporations’ home countries.
Yet another layer of the global minimum tax is for the largest multinationals, with excess profits (profits in excess of 10% of revenue). The tax rate here would be 25%.
The global minimum tax could take effect starting in 2023 if countries enact the law in 2022. The law has not yet been enacted by the U.S. However, Treasury Secretary Yellan is confident Congress will approve it; this hasn’t happened yet.
Does it impact small businesses?
Obviously, small businesses are not directly subject to the global minimum tax. Even those doing business abroad don’t meet the profits threshold for the tax. Nonetheless, small businesses, as well as consumers, in the U.S. likely will feel the impact. Seniors like me probably remember the 1953 quote (which is not exactly what was said : “As GM goes, so goes the nation.” I don’t expect small businesses to escape the impact of a global minimum tax.
Inc. listed the good and the bad effect that the global tax could have on small businesses, as excerpted here:
- The good: Increased competitive fairness. The global tax would end the competitive advantage that multinationals have in cutting their taxes by going elsewhere.
- The bad: Supply chain pressure. Already stressed, small businesses that have large corporate customers could see their supply chain headaches grow. Those customers may reduce their demand. Small businesses may also see increased prices over time.
The bottom line is that no one really knows what the impact of a global minimum tax will be. Unintended consequences? Likely. What they’ll be? Who knows?
What to do?
Despite uncertainty, it’s not too soon to start thinking about a global minimum tax and your business. Think ahead. Do you forecast any direct or indirect impact on your business from enactment of a global minimum tax? This may occur, for example, if you have large corporate customers or you directly compete with them (perhaps, for example, selling on Amazon).
Monitor developments in Congress. Plan to react if and when the time comes.