In October 2021, the OECD announced that 136 countries and jurisdictions representing more than 90% of global GDP had agreed to subject multinationals to a minimum 15% tax rate from 2023.
However, introducing a standard global tax rate was never going to be easy. Corporates have lobbied politicians for exemptions, while disagreements over how to calculate taxable income resulted in the US government deciding not to include a global minimum corporate tax rate in its recently passed Inflation Reduction Act.
In the EU, Hungary is refusing to ratify the new rate, claiming that its economy depends on the government being able to lower taxes. As a result of these and other delays, many observers believe it will be 2024 before the rules are fully implemented.
From a treasury perspective, the calculations required to comply with the global minimum tax are complex and will require significant resources. Data from ERP and treasury systems beyond what is normally necessary for tax reporting and compliance will be required and the calculation is expected to demand significant additional treasury resources.
Payroll is just one of the dozens of data points that will have to be tracked to ensure compliance.
To understand the scope of the work required, Ross Robertson, International Tax Partner at BDO recommends undertaking an impact assessment, which should include determining the impact on cash and working capital requirements and assessing the adequacy of operating systems to capture the additional data required.
Another area impacted by the new rules is corporate financing structures explains Rob Waddington, Treasury & Commodity Group Partner at PwC.
Treasury and tax teams often work together to set up the optimal debt and equity mix based on the applicable tax rate in each territory, he told a recent webinar hosted by the Association of Corporate Treasurers. By changing the effective tax rate in some of those countries, financing structures will have to be reassessed.
Multinationals may be faced with the prospect of having to increase, decrease or even repay intercompany debt. “These loans often offset some other FX exposure and removing them could create imbalance within the group’s FX risk management strategy,” adds Waddington.
He recommends treasurers make an inventory of intercompany financing arrangements to identify balances and interest rates and the tax locations of each entity.
Companies will also have to deal with increased cash tax volatility because of more complex cash tax calculations observes PwC International Tax and Treasury Partner, Graham Robinson, adding that hedging arrangements around FX or other derivatives may need to be revisited.
“These arrangements give rise to book tax differences between P&L and tax base in a local territory,” explains Robinson. “Some of the rules correct for these differences, but it is a little arbitrary as to which differences are corrected. This means that hedging arrangements that used to work for tax purposes by aligning the tax treatment of the hedge with the tax treatment of what is being hedged won’t necessarily work now.”
There is some good news for treasury teams in that entities and functions with a stable profit base (cash pooling, payment centres) that are taxed on book profits will not face the kind of volatility issues outlined above.
The OECD is currently developing guidance to clarify the implementation process. “In the meantime, it is important for treasury teams to make assessments based on the rules as they stand because the main concepts will not change,” cautions Robinson.
Jeff Goldstein, a former special assistant to the chairman of the White House Council of Economic Advisers, reckons that once a major economy imposes the tax and starts collecting additional revenues, other countries will follow suit.
“Multinational corporations in non-participating countries would be paying more taxes either way, and countries will want to keep the revenue their corporations are sending elsewhere,” he says.