The Benefits of Setting a Lower Limit on Corporate Taxation

IMF Blog, June 9, 2021

Source details

On June 5, 2021, Finance Ministers from the Group of Seven committed to a global minimum corporate tax rate on multinationals of at least 15 percent.
The agreement is described as a historic step forward toward international corporate tax reform and gives fresh momentum to ongoing global discussions.
Article date and authorship: AQIB ASLAM, Maria Coelho, June 9, 2021.

Trend: Nearly four decades of falling global corporate tax rates have increased incentives for large multinationals to shift profits to low-tax jurisdictions.
Domestic minimum taxes have been used since at least the 1960s at the local level to prevent erosion of the tax base from tax preferences (credits, deductions, special exemptions, allowances).
Purpose of a corporate minimum tax: guarantee a floor on businesses’ contribution by using an alternative simplified tax base to avoid complexities of the standard corporate tax base.
Typical minimum-tax bases:
- Turnover (gross income or receipts)
- Assets (net or gross)
- Modified definitions of corporate income that limit deductions and exemptions
Turnover-based minimum taxes are the most prevalent and tend to be found in countries with higher statutory corporate tax rates.
Countries that levy a minimum tax also tend to report higher corporate tax revenue as a share of GDP.

Introducing a minimum tax is associated with an increase in the average effective tax rate (the tax rate actually paid after tax breaks):
- just over 1.5 percentage points with respect to turnover
- around 10 percentage points with respect to profits
Minimum taxes based on modified corporate income lead to the largest increases in effective tax rates, followed by those based on assets and turnover.
The ultimate revenue impact depends on the rate applied.

Hypothetical minimum tax scenarios analyzed:
- 0.5 percent on turnover
- 1 percent on total assets
For the median country in the sample:
- A turnover-based minimum tax of 0.5 percent could raise an additional 7 percentage points of tax revenue for governments relative to current levels.
- An assets-based minimum tax of 1 percent could raise almost a third more.
Translating to GDP shares (median country):
- Turnover-based scenario: average of 0.2 percent of GDP in additional revenue.
- Assets-based scenario: average of 0.9 percent of GDP in additional revenue.
Baseline reference: median corporate income tax-to-GDP ratio of 2.7 percent.

OECD and G20 proposal (late 2020): global minimum corporate tax that would apply to profits of multinationals, with countries supplementing tax liability when a multinational pays less than the global minimum rate in another country.
Key distinction: the OECD/G20 global proposal would not focus solely on income generated within a country; payments are triggered if other countries don’t tax multinationals enough.
Local minimum taxes could grow in use as a simpler alternative for countries, especially low-income and developing countries that may lack capacity to implement complex global provisions.
Trade-offs:
- Local minimum taxes can tap significant revenue despite inefficiencies.
- Moderate local minimum rates can preserve revenue and prevent tax-base erosion without severely damaging corporate activity.

Minimum taxes are a useful tool to preserve the corporate tax base and mobilize revenue, particularly for developing countries with weaker tax administrations.
Minimum taxes alone cannot replace reforms to broaden the corporate tax base; addressing proliferation of multiple rates and special preferences remains essential.
Governments should prioritize tackling and removing tax incentives and special preferences that cause distortions and encourage tax avoidance and evasion.
Even after a global minimum tax (e.g., 15 percent), tax incentives to attract multinationals are likely to persist, but their value will decline because multinationals will only be able to reduce liabilities to 15 percent and not zero.

Source: The Benefits of Setting a Lower Limit on Corporate Taxation (IMF blog), June 9, 2021.