The Impact of Global Taxation on Multinational Corporations

The earnings of multinational companies are made all over the world, and those profits are attracted back to headquarters. Profits are supposed to face tax under international tax rules.

While multinational companies minimise their global corporate income taxes by shifting their investments to low-tax countries, a select number of governments are searching for a solution such as a worldwide minimum tax to neutralise this advantage.

General Policy Areas

Global taxation therefore raises far more than just tax issues. It raises important questions in a number of areas of law, in relation to multinational business activity, for example, between multinational corporations (MNCs) adopting transfer-pricing strategies so as to minimise the tax they pay in their domestic countries as well as abroad (base erosion and profit-shifting BEPS, in the jargon).

Yet it is unlikely that any meaningful levels of international co‑ordination about such issues will materialise; and such co‑ordination, if it did, would only increase the burdens of tax administration with respect to data interrogation.

Rather, other countries are moving to strengthen the rules so that multinationals pay some minimum level of taxes – including an OECD agreement in 2021 imposing a global minimum tax rate of at least 15 per cent on multinational income to reduce incentives for nations to serve as corporate tax havens and close loopholes that multinationals otherwise use to avoid tax, as the EU intends to do.

Tax Treaties

In response to increasing globalisation, however, states have taken steps to strengthen control over the taxation of multinational firms. For example, they have concluded bilateral treaties with other states that have agreed to set a common framework for dispute resolution regarding the application of international tax rules.

Global investment decisions are not limited by competition among corporate tax rates and bases alone. Resources required for production, workers whose skills fit the work at hand, the infrastructure demanded, the regulatory systems, and the risk that a given company’s overseas investments might be rescinded are all critical areas that companies consider alongside corporate tax rates and bases.

Finally, in the face of considerable international pressure, the OECD is moving toward the reform of global corporate taxation. Two pillars of the OECD’s proposed agenda for change would shift the tax burden across countries, while providing some discipline against abuse of tax havens; unfortunately member governments are protecting the multinationals they host by blocking attempts to move toward a more effective and equitable corporate tax regime. This all points to what is likely to be a long period of stalemate over international tax reform.

Rules to Minimize Tax Avoidance

Because an economy in the modern world is based on mobile capital investments and other kinds of physical assets, the multinationals – not only in the private sector, but also in the public space, such as charities and healthcare providers – have powerful incentives to minimise their taxable income and taxes, and maximise profits. A rule under Pillar One has been advocated by the Organisation for Economic Co-operation and Development (OECD), an intergovernmental economic organisation with 38 member countries, as a countermeasure to tax avoidance by setting the minimum global corporate tax rate.

Formulary apportionment removes the artificial incentive for firms to shift profits to low-tax jurisdictions by measuring real economic activity at each location, while hybrid arrangements allow multinationals to use foreign affiliates as arms-length buyers when moving goods and services between locations.

Pillar One, too, would create a global minimum corporate tax rate of 15 per cent, giving countries more even playing fields and allowing governments more resources with which to fight global problems such as pandemics, climate change and forced migration.

The Global Tax Deal

Following up to a decade of negotiation in the Organisation for Economic Co-operation and Development, 132 countries [in May 2021] have agreed to new rules on taxing multinationals that will dramatically increase taxes on these companies. With ‘formulary apportionment’, a large multinational would be considering itself as a unit of business, and it would apply a formula to prorate profits by geographical allocation of actual activity – one analysis estimates an average increase of 15 per cent for large MNCs in developing economies.

The second pillar, a mandatory 15 per cent corporate tax rate worldwide aims to preclude massive MNCs from shifting profits and reducing their tax bills into tax havens – a drain on governments for $240 billion in taxes annually for which the Global South is more acutely impacted (unable to fall back on other forms of tax revenue). These two proposals, while they might eliminate much of tax competition and the ensuing race to the bottom on tax rates for corporations, would likely do little in practice without enforcement mechanisms.