The Cayman Islands. Bermuda. Monaco. The Bahamas.

Each of these countries is synonymous with one thing: tax. Or, more specifically, a lack of tax.

Aptly referred to as ‘tax havens’, these offshore nations provide little to no tax liability, meaning businesses and individuals can lower the amount of tax they pay significantly without any obligation to share financial information with foreign tax authorities. Such financial privacy means there’s often speculation around the legitimacy of many offshore investments.

Generally, it’s only the largest businesses with the highest turnovers that have access to the offshore tax rates, perpetuating the divide between the ‘haves’ and the ‘have-nots’. To name a few: Google, Facebook, Microsoft, Apple, Nike and Starbucks all shift their profits from their revenue markets into low-tax jurisdictions.

What’s been proposed?

In an attempt to tackle the imbalance, two noteworthy initiatives have been proposed. The first aims to end ‘profit shifting’ to tax havens by taxing company profits based on the country in which the revenue was generated rather than where its offshore headquarters are located.

The second pillar will set a minimum global tax rate of at least 15% — lower than the 21% initially proposed by US President Joe Biden.

The minimum rate is to apply to multinationals with a profit margin threshold of 10%, with the reform expected to capture roughly 8,000 multinational companies, including Amazon, Facebook, BP, Shell, BT, HSBC, Barclays and Santander. 

What effect will it have?

If it comes to pass, the plans for global minimum taxation on corporate profits could unsettle those corporations with high overseas revenue and low tax bills. These reforms have been introduced not only to ensure large multinational businesses pay their fair share of tax but also to alleviate the strain on public finances. The UK is estimated to reap an extra £14.7 billion each year based on a 21% global minimum tax rate — allowing the government to pay off debts incurred during the pandemic.

Conversely, it’s anticipated that economies such as Ireland could lose out on up to €2 billion annually. Other nations with low tax rates will also feel the effects the most, including Hungary, Canada, Hong Kong and Singapore.

What does the future look like?

The global digital age will undoubtedly benefit from the reforms as they’ll help achieve a more level playing field for all kinds of companies. That said, the new taxation system should seek to ensure the UK remains an attractive place to do business.

With an open-for-negotiation clause of ‘at least’ 15% minimum tax, some economies are in talks about bumping this figure up in the future. Biden’s figure of 21% is supported by Labour shadow chancellor Rachel Reeves, who suggested that Britain should be fighting for the higher percentage.

As it stands, the UK’s corporate tax rate of 19% is the lowest out of the G7 group. However, it’s set to rise to 25% by 2023 following the impact of spending during the pandemic.

Trusting an Employer of Record with your international employment services means you can stay one step ahead of the curve when it comes to changes and reforms in legislation around the world. As a Professional Employer Organisation, we’re here to support your global employment and business expansion. Contact the team today.

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Published On: 28/06/21Last Updated: 14/09/22

About the Author: Sam Barnes

Sam is our Global Business Development Manager for Employer of Record services. For the last 10 years, he has assisted companies in the successful execution of their international expansion plans. Sam tells us “There’s something inherently exciting about growing a business into overseas jurisdictions. Each country does things slightly differently and it’s great to be able to share learnings on statutory requirements and cultural nuances”. Email: sam.barnes@topsourceworldwide.com

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