While the tax deal is complex in its details, the
idea behind the minimum tax is simple: if a
multinational company escapes taxation abroad,
it would have to pay the minimum at home.
Here’s why it was proposed and how it
would work.
THE PROBLEM: TAX HAVENS AND THE
‘RACE TO THE BOTTOM’
Most countries only tax domestic business
income of their multinational companies, on
the assumption that the profits of their foreign
subsidiaries will be taxed where they are earned.
But in today’s economy, profits can easily slide
across borders. Earnings often come from
intangibles, such as brands, copyrights and
patents. Those are easy to move to where taxes
are lowest — and some jurisdictions have been
only too willing to offer reduced or zero taxation
to attract foreign investment and revenue, even
if companies do no real business there.
As a result, corporate tax rates have fallen in
recent years, a phenomenon dubbed a “race
to the bottom” by U.S. Treasury Secretary
Janet Yellen.
From 1985 to 2018, the worldwide average
corporate statutory tax rate fell from 49%
to 24%. From 2000-2018, U.S. companies
booked half of all foreign profits in just seven
low-tax jurisdictions: Bermuda, the Cayman
Islands, Ireland, Luxembourg, the Netherlands,
Singapore and Switzerland. The OECD estimates
tax avoidance costs anywhere from $100 billion
to $240 billion, or from 4% to 10% of global
corporate income tax revenues.