Recently, over 130 countries reached an agreement regarding a global corporate tax. These efforts aim to prevent corporations from shifting tax revenues and profits from countries with lower tax rates, keeping them in their home countries.
This change will affect companies operating in different countries when it goes into effect, which is likely to be in 2023, so it can be crucial to understand what this means.
Which companies will this affect?
Broadly, the global minimum tax rates will primarily impact large, multi-national corporations. Companies that collect significant profits from intangible assets would also be widely affected.
If you own a small- or mid-size business here in Canada, it likely will not affect your day-to-day operations. That said, it could change what you are planning for the future.
How might this change future plans?
If you have plans to take your business international, this change could significantly impact where you expand or move. And for multi-national corporations with subsidiaries in places with low tax rates like Ireland, the change will certainly affect things like approaches to transfer pricing, sales and tax strategies.
Currently, there is an incentive for corporations to assign earnings and profits on intangible goods, like intellectual property, to countries with the lowest tax rates. However, by setting the global tax rate at 15 percent, corporations would not have this incentive because their home country would add a top-up tax to bring the rate up to the minimum.
Note that the minimum standard does not apply to local tax rates, which remain in the hands of individual governments.
More revenue, but at what cost?
The change could mean an added $4.5 billion to Canada’s economy, but not everyone is in favour of this. Corporations will face significant financial changes, while some critics of the international deal feel Canada should focus on its own solutions.
Whichever side of the issue you fall on, this is an issue that many Canadian corporations will need to come to terms within the next year.
Tax strategies and requirements can be immensely complicated for businesses, especially when provincial, federal and international tax laws change. Thus, taking the time now to assess your options in light of this most recent change can be crucial.