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Global minimum tax rate: What that means for Australia

·3-min read
US dollar and China Yuan banknote  with multi countries banknotes. Its is symbol for tariff trade war crisis or unfair business of 2 biggest economic countries in the world.
Image: Getty.

A global minimum tax rate could soon become a reality as the Biden administration adds its voice to calls in support of the competition change.

Biden’s proposal is calling on the biggest multinational companies to pay tax to local governments based on domestic sales. It comes as momentum grows towards a global minimum corporate tax rate.

If a standardised global corporate tax rate were to occur, it would mean the US President could increase corporate taxes to 28 per cent without worrying about losing multinational companies to cheaper, offshore bases.

In fact, it would mean most countries could have more freedom to increase corporate tax rates without triggering a multinational exodus.

The US would like to see this global minimum tax rate increase to 21 per cent, still significantly below Australia’s corporate tax rate of 30 per cent.

It comes after US Treasury Secretary Janet Yellen voiced her support for the move earlier this week.

Yellen said she’s currently working with G20 countries to decide on what that global minimum would be, in the hopes that such a policy would end a “30-year race to the bottom on corporate tax rates”.

The Organisation for Economic Cooperation and Development (OECD) has been facilitating tax negotiations involving some 140 countries for two years now in the hopes of reducing tax avoidance and standardising rules around how digital giants are taxed.

The OECD and G20 countries plan to reach a consensus on the rate by the middle of this year. Governments have already broadly agreed to the design of the proposal, the OECD said in March. Now it’s time to decide the rate.

Okay, what does it mean for Australia?

“A global minimum tax would mean that multinationals, and then small businesses, are on a level playing field,” HLB Mann Judd director of tax consulting Lauren Whelan told Yahoo Finance.

While she thinks it will take until at least mid-2024 before the new minimum tax rate is legislated, Whelan believes it will have some trickle down effects for Australians.

“How it will impact Australians: previously, multinationals may invest money into other low tax jurisdictions such as Singapore and Hong Kong, but there will be less incentives to be investing into these lower tax jurisdictions, and as such we could be bringing more investment onshore to Australia.”

AMP Capital chief economist Shane Oliver told Yahoo Finance that the policy could also mean lower corporate earnings, which could impact investors.

For Australian investors investing in companies overseas, it could mean lower corporate earnings as companies are taxed at a higher rate.

For shareholders of Australian companies, it’s unlikely to have a huge impact on returns.

Australian companies are generally paying the Australian tax rate which would remain higher than the minimum global rate, Oliver said.

“I don’t think you’ll have a huge impact on Australian companies, particularly the smaller ones where it’s harder for them to take advantage of lower tax rates overseas.”

The more likely outcome is that certain countries, like Ireland, Singapore and Hong Kong, where the corporate tax rates are low, will find themselves becoming less attractive to large multinationals, and activities may shift back onshore.

“For Australia, I don’t think it will have a huge impact on our companies. It could actually make them more competitive internationally,” he said.

The biggest losers, Oliver predicts, will be America’s big tech companies, some of which are paying just 8 cents in the dollar in tax.

But that’s not going to translate into more expensive iPhones or tech devices, he added.

“It’s always known that as tax rates go up, for companies there’s an increase in costs and higher prices, but I would think it’s unlikely [to lead to higher consumer costs].

“It’s a possibility, but it’s unlikely that that would happen.”

Image: Yahoo Finance
Image: Yahoo Finance
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