G7 Tax Deal - A starting point for global tax reform?

Leaders around the world are quickly moving to finalize an agreement on a global minimum tax in 2021, based on the so-called “ Pillar Two” proposal from the Organization for Economic Co-operation and Development (OECD). 

The agreement would limit tax competition and the “ race to the bottom” on corporate tax rates by putting a floor on effective tax rates applied to cross-border investment by large multinational corporations. 

The political effort to address profit shifting and limit the benefits of using low-tax jurisdictions to facilitate cross-border investment has focused on adopting a global minimum tax applicable to large multinational corporations. While a global minimum tax could act as a backstop to current corporate tax rules, it would also increase the tax burden on business investment across the world. The experience of U.S. companies shows that policies that increase the taxes owed on offshore operations can have negative blowback effects on domestic markets. 

As foreign direct investment (FDI) is sensitive to tax rates, a global minimum tax would directly impact investment decisions of multinational companies. 

To mitigate the negative economic effects of a global minimum tax, policymakers should ensure that both the minimum rate and the tax base to which it applies are designed in a way that does not distort investment decisions but still acts as a backstop to current corporate tax rules.