The OECD needs to solve some important design challenges in its work to create a global minimum tax plan, including when the tax would kick in and how it would interact with anti-base erosion rules, a Treasury official said.
“I think while a minimum tax is a fairly simple idea for people to grasp politically, it is a much more challenging technical matter to actually draft a regime that works smoothly,” said Lafayette “Chip” Harter, deputy assistant secretary of international tax affairs at the Treasury Department.
For example, the group must decide whether the minimum tax would apply to a multinational’s activities in any country with an effective tax rate below an agreed-upon threshold, or just if the company’s global foreign average tax rate was too low, Harter said April 1 at a Tax Executives Institute event in Washington.
Other challenges include deciding how a minimum tax would interact with a “defensive regime” that denies deductions for payments made to an offshore entity that isn’t subject to the minimum tax regime, and how to avoid double taxation if many countries adopt such rules, Harter said.
The minimum tax proposal seems inspired by U.S. global intangible low-taxed income rules, part of the 2017 tax overhaul, which kick in if a company isn’t paying enough tax on its foreign income. The defensive measures could have “a little flavor” of the U.S. base erosion and anti-abuse tax, Harter said. The BEAT applies when 3 percent or more of a company’s deductible payments are considered base-eroding.
The Organization for Economic Cooperation and Development is working on a rewrite of global tax rules that could change where and how much multinationals are taxed. The minimum tax is one proposal to address global concerns that current rules don’t adequately capture enough revenue, or revenue in the right places, from modern business structures like digital companies.