The global minimum tax is now in effect in the UK for qualifying multinational groups for accounting periods beginning on or after 31 December 2023. A number of other jurisdictions have also implemented the rules or are in the process of implementing them. So it is timely that an OECD paper (January 2024) has been published which provides an updated assessment of the impact of the global minimum tax on the taxation of MNEs. The findings were presented at an OECD webinar on 9 January 2024.
The process of assessing the economic impact of the global minimum tax is an iterative one which has come a long way in both methodology and figures from the first impact assessment in October 2020 which, based on data from 2016, estimated additional global tax revenues of $100bn (or 4% of global CIT revenues). Then in January 2023, the OECD shared a revised estimate of $220bn (or 9% of global CIT revenues) based on more data (2016-2018) and updated methodology taking into account developments in the Model Rules).
This has been reduced to between $155bn and $192bn (so between 6.5 and 8.1% of annual global CIT revenues) in the latest OECD paper (January 2024). Two-thirds of the additional tax revenues are expected to come directly from the global minimum tax and the other third from reduced profit shifting as a result of behaviour change.
So what has changed since last January?
The latest impact assessment uses updated modelling (including reflecting the agreed final design of the Model Rules), updated assumptions (taking into account the incentive for jurisdictions to introduce QDMTTs) and more recent data (2017-2020 compared with the October 2020 economic impact assessment which was based on 2016 data and which the January 2023 revised revenue impact update expanded to 2016-2018).
The decrease in the expected additional revenues since January 2023 is partly because the data for 2017-2020 includes the period of the pandemic when many MNEs experienced lower profitability than was taken into account in the 2016-2018 data. Another factor is that the new modelling and data more effectively account for the interaction of GILTI and the GloBE rules and take into account losses. But the impact analysis is still subject to many caveats, assumptions and modelled scenarios that will continue to vary.
As with previous impact assessments, jurisdiction-specific results are not made public by the OECD, although they will be shared with the relevant jurisdictions. Instead, the jurisdictions are grouped together as income groups: investment hubs, high income, upper middle income, lower middle income and low income jurisdictions; or as average effective tax rate (ETR) groups (but details of who is in which ETR group are not given for confidentiality reasons).
There is substantial low-taxed profit in high-tax jurisdictions
Low-taxed profit is defined as profit subject to ETRs below 15%. The OECD’s report on global low-taxed profit (November 2023) revealed that more than 50% of low-taxed profit globally is located in high-tax jurisdictions (those with an average ETR above 15%) and so the January 2024 paper reflects more granular estimates of low-taxed profit globally, moving away from a bifurcation of high-tax/low-tax jurisdictions to seek out low-taxed profit even in jurisdictions which have high effective tax rates. Low-taxed profit in high-tax jurisdictions is mainly due to tax incentives, such as tax holidays and patent boxes.
According to the January 2024 paper, as a result of the global minimum tax, global low-taxed profit is estimated to reduce by about 80% (from 36% of all profit globally to just 7% at the end of the ten year transitional period). The remaining 7% mainly reflects the impact of the substance-based income exclusion which is intended as a proxy for routine returns from investment in substantive activities.
Which jurisdictions gain the most?
The latest OECD paper finds low-taxed profit in every jurisdiction and revenue gains are expected to accrue to all jurisdictions. So everyone’s a winner unless they do not implement the rules and forgo revenues that would otherwise accrue to them! The distribution of revenue gains depends on implementation and the behavioural reactions of MNEs.
A jurisdiction which implements a Qualified Domestic Minimum Top-Up Tax (QDMTT) will be able to capture top-up taxes from low-taxed profit arising in their own jurisdiction. Undertaxed Profits Rule (UTPR) gains for some jurisdictions could be larger than estimated if some larger countries (such as the US) do not implement the rules, although there are signs that the imposition of UTPR charges in respect of profits originating in such countries could result in trade tensions.
The OECD expects differences in taxation between jurisdictions to fall as a result of the increase in taxation of low-taxed profits worldwide which will reduce the incentive for profit shifting. The OECD notes, however, that behavioural response may take some time to materialise as MNEs gradually restructure their operations. This makes accurate estimations difficult.
The jurisdictions with the most low-taxed profits (investment hubs) are expected to gain the most revenues in the short term (if they adopt a QDMTT to tax their low-taxed profits), but they are expected to lose approximately 30% of their tax base over time due to reduced profit-shifting – this would then lead to revenue gains for other jurisdictions. Investment hubs are generally defined as jurisdictions with a total inward foreign direct investment position above 150% of GDP on average across 2017-2020 and include Ireland, Luxembourg and the Netherlands (see Annex E of the January 2024 paper for the full list).
High income countries (which includes the UK) and low income countries have higher estimated revenue gains relative to middle-income countries.
UK impact assessment
So just how much of the increased revenue gains from global minimum tax is the UK expecting to see? At the Autumn Statement 2023 it was announced that: ‘The Multinational Top-up Tax, Domestic Minimum Tax and Undertaxed Profits Rule are expected to raise approximately £12.7 billion in the UK in total over the next 6 years.’ So about £2bn a year then.
There is also an opportunity here for the UK to benefit from increased investment once the investment hubs lose their competitive tax advantage and non-tax factors become more important, such as education, infrastructure and the overall investment environment. With this in mind, it would be a good time for the government to focus on improvements to increase the attractiveness of the UK’s non-tax factors!
The global minimum tax is now in effect in the UK for qualifying multinational groups for accounting periods beginning on or after 31 December 2023. A number of other jurisdictions have also implemented the rules or are in the process of implementing them. So it is timely that an OECD paper (January 2024) has been published which provides an updated assessment of the impact of the global minimum tax on the taxation of MNEs. The findings were presented at an OECD webinar on 9 January 2024.
The process of assessing the economic impact of the global minimum tax is an iterative one which has come a long way in both methodology and figures from the first impact assessment in October 2020 which, based on data from 2016, estimated additional global tax revenues of $100bn (or 4% of global CIT revenues). Then in January 2023, the OECD shared a revised estimate of $220bn (or 9% of global CIT revenues) based on more data (2016-2018) and updated methodology taking into account developments in the Model Rules).
This has been reduced to between $155bn and $192bn (so between 6.5 and 8.1% of annual global CIT revenues) in the latest OECD paper (January 2024). Two-thirds of the additional tax revenues are expected to come directly from the global minimum tax and the other third from reduced profit shifting as a result of behaviour change.
So what has changed since last January?
The latest impact assessment uses updated modelling (including reflecting the agreed final design of the Model Rules), updated assumptions (taking into account the incentive for jurisdictions to introduce QDMTTs) and more recent data (2017-2020 compared with the October 2020 economic impact assessment which was based on 2016 data and which the January 2023 revised revenue impact update expanded to 2016-2018).
The decrease in the expected additional revenues since January 2023 is partly because the data for 2017-2020 includes the period of the pandemic when many MNEs experienced lower profitability than was taken into account in the 2016-2018 data. Another factor is that the new modelling and data more effectively account for the interaction of GILTI and the GloBE rules and take into account losses. But the impact analysis is still subject to many caveats, assumptions and modelled scenarios that will continue to vary.
As with previous impact assessments, jurisdiction-specific results are not made public by the OECD, although they will be shared with the relevant jurisdictions. Instead, the jurisdictions are grouped together as income groups: investment hubs, high income, upper middle income, lower middle income and low income jurisdictions; or as average effective tax rate (ETR) groups (but details of who is in which ETR group are not given for confidentiality reasons).
There is substantial low-taxed profit in high-tax jurisdictions
Low-taxed profit is defined as profit subject to ETRs below 15%. The OECD’s report on global low-taxed profit (November 2023) revealed that more than 50% of low-taxed profit globally is located in high-tax jurisdictions (those with an average ETR above 15%) and so the January 2024 paper reflects more granular estimates of low-taxed profit globally, moving away from a bifurcation of high-tax/low-tax jurisdictions to seek out low-taxed profit even in jurisdictions which have high effective tax rates. Low-taxed profit in high-tax jurisdictions is mainly due to tax incentives, such as tax holidays and patent boxes.
According to the January 2024 paper, as a result of the global minimum tax, global low-taxed profit is estimated to reduce by about 80% (from 36% of all profit globally to just 7% at the end of the ten year transitional period). The remaining 7% mainly reflects the impact of the substance-based income exclusion which is intended as a proxy for routine returns from investment in substantive activities.
Which jurisdictions gain the most?
The latest OECD paper finds low-taxed profit in every jurisdiction and revenue gains are expected to accrue to all jurisdictions. So everyone’s a winner unless they do not implement the rules and forgo revenues that would otherwise accrue to them! The distribution of revenue gains depends on implementation and the behavioural reactions of MNEs.
A jurisdiction which implements a Qualified Domestic Minimum Top-Up Tax (QDMTT) will be able to capture top-up taxes from low-taxed profit arising in their own jurisdiction. Undertaxed Profits Rule (UTPR) gains for some jurisdictions could be larger than estimated if some larger countries (such as the US) do not implement the rules, although there are signs that the imposition of UTPR charges in respect of profits originating in such countries could result in trade tensions.
The OECD expects differences in taxation between jurisdictions to fall as a result of the increase in taxation of low-taxed profits worldwide which will reduce the incentive for profit shifting. The OECD notes, however, that behavioural response may take some time to materialise as MNEs gradually restructure their operations. This makes accurate estimations difficult.
The jurisdictions with the most low-taxed profits (investment hubs) are expected to gain the most revenues in the short term (if they adopt a QDMTT to tax their low-taxed profits), but they are expected to lose approximately 30% of their tax base over time due to reduced profit-shifting – this would then lead to revenue gains for other jurisdictions. Investment hubs are generally defined as jurisdictions with a total inward foreign direct investment position above 150% of GDP on average across 2017-2020 and include Ireland, Luxembourg and the Netherlands (see Annex E of the January 2024 paper for the full list).
High income countries (which includes the UK) and low income countries have higher estimated revenue gains relative to middle-income countries.
UK impact assessment
So just how much of the increased revenue gains from global minimum tax is the UK expecting to see? At the Autumn Statement 2023 it was announced that: ‘The Multinational Top-up Tax, Domestic Minimum Tax and Undertaxed Profits Rule are expected to raise approximately £12.7 billion in the UK in total over the next 6 years.’ So about £2bn a year then.
There is also an opportunity here for the UK to benefit from increased investment once the investment hubs lose their competitive tax advantage and non-tax factors become more important, such as education, infrastructure and the overall investment environment. With this in mind, it would be a good time for the government to focus on improvements to increase the attractiveness of the UK’s non-tax factors!
