Canada is taking steps to comply with a global minimum tax of 15% on multinational companies from 2023, but a report says the new regime could negatively impact Canada’s wealth and tax revenues and force countries to compete for international taxes on a “first come, first served” basis.
The CD Howe Institute May 31 reportwritten by Angelo Nikolakakis, a partner at international law firm EY Law, argues that unless Canada makes “further strategic adjustments,” it “will likely be impoverished.”
The global minimum corporate tax scheme advocated by the Organization for Economic Co-operation and Development (OECD) and the G20 rests on two pillars. The first pillar assigns new taxing rights to countries where around 100 of the world’s largest multinational enterprises (MNEs) operate. The second pillar establishes a minimum tax of 15% on multinationals with consolidated annual revenues of €750 million (C$1 billion), which includes many Canadian multinationals.
“The regime is considering the introduction of a real fiscal assortment,” Nikolakakis said.
The report analyzed the most recent OECD publications regarding the implementation of the minimum tax “model rules”, which describe the process that countries should use to calculate the additional tax required if the tax rate a company’s workforce is less than 15% and how Canada could potentially compete for a greater share of that tax revenue.
“The best results would be achieved if Canada adopted a Canada-centric approach, in which Canadian multinational business groups were incentivized to reduce foreign taxes, so as to make Canada the country that collects the global minimum tax of 15%,” Nikolakakis said. said.
But instead of generating additional tax revenue under the scheme, Canada could suffer losses, according to the report. Nikolakakis pointed out that if affected foreign jurisdictions increase their tax rates, either generally or under Pillar Two, Canada’s adoption of Pillar Two may not increase the $3.5 billion in revenue. annual taxes estimated by the Minister of Finance of Canada.
Indeed, as Nikolakakis explained, if Canadian-based MNEs pay more foreign tax, it would likely result in an offset against the Canadian taxes they would otherwise have to pay and, more importantly, result in lower foreign income. after tax for these MNEs.
“This, in turn, would reduce their ability to reinvest and reduce their distributions to Canadian stakeholders, with negative implications for the broader Canadian economy,” the report said.
Say the choices to be made
Nikolakakis criticized the model rules. While he said they would not completely eliminate the benefits for multinational companies to earn cross-border income from low-tax jurisdictions, those benefits would be diminished. He added that the rules would also create incentives for some governments to opportunistically increase their tax rates and, furthermore, the rules could discourage governments from relying “on their tax systems as instruments of industrial policy and social, through investment and development”. incentives.”
The report outlines considerations for Canada in implementing the 15% minimum tax. One option could be to reform the country’s international tax regime to increase the likelihood that multinationals will pay the top-up tax in Canada rather than to foreign jurisdictions.
The Model Rules allow a country to impose the additional tax on the profits of a multinational enterprise in another country where no additional tax is imposed and where the effective tax rate is less than 15%.
Canada is a relatively high tax jurisdiction, with a federal corporate tax rate of 26.5%and Nikolakakis says multinationals would be inclined to keep their income in foreign jurisdictions to avoid paying more than the 15% minimum.
Another consideration for Canada, however, is attracting businesses and income from foreign multinationals that would prefer to pay their additional taxes to their parent jurisdictions, in which case Canada could refuse to impose additional tax, according to the report.
Canada is one of 137 OECD members who have so far accepted the OECD/G20 Framework for Overhauling the International Taxation of Large Multinationals.
The aim of the scheme is to end the ‘race to the bottom’ in corporate taxation, where countries like Ireland have attracted multinationals with low corporate tax rates.
Canada is working on a Digital Services Tax (DST)but the feds said in Budget 2022 that they hope that the new international system will be online soon and will make the deployment of summer time unnecessary.
The federal budget also announcement the launch of a public consultation on the implementation of the 15% tax and the complementary national tax, while grateful that “it is not possible to reliably estimate the impact on revenues [of the global minimum tax] right now.”