20 of the world's finance ministers of the world's largest economies gathered and agreed, on Saturday 10th of July, to set a minimum tax rate for corporate income of 15%. The finance ministers have also agreed to shift where some taxes are collected to fit the modern digital economy. This assists President Biden's mandate to stop multinational corporations from shifting their profits to low-tax countries.
What the new G20 tax plans means for multinationals and businesses
132 countries agreed to the new tax systems after meetings were conducted by the G20 and the Organization for Economic Co-operation and Development. The system is projected to be implemented by 2023 and aims to prevent larger corporations from moving their profits to low-income countries. This new tax system will have an impact on all businesses, from multinationals to small LLCs in Texas. Multinationals generating revenue more than $890 million will feel the effects of the minimum corporate tax of 15%. Taxes will now be redirected causing nationals to pay taxes in the regions where their goods and/or services are offered. Multinationals that generate a revenue higher than $23.8 billion will have to pay between 20% to 30% of their profits above a 10% margin to the countries where they are based. Oil and financial companies have been exempted from this ruling. The Organization for Economic Co-operation and Development said that because multinationals have deprived countries of between $100 billion and $240 billion, which is approximately 4-10% of global corporate income taxes, the need for a new tax system is necessary. Multinationals have identified gaps in other tax systems and have used this to their advantage by picking and choosing how they would like to be taxed.
For example, the US government will receive less tax from companies such as Apple and Google, while other companies reap the benefits of the sales and services done by those businesses in their regions. Businesses, such as Volkswagen and Samsung whose headquarters are not located in the US, will have to start paying taxes to the US government. According to US President Biden, companies based in countries that have not chosen to join the new tax system will be forced to pay higher tax rates. This higher tax rate will be used as a tactic to persuade the opposing countries to join the new tax system.
The US Corporate Incorporation Remains Attractive
To use the new tax system to their advantage, business owners can turn their company into a US incorporation. By doing so, the incorporated business owner will reap benefits such as being able to file tax as an individual. This will allow incorporated businesses to spread out tax losses and defer taxes. They will also be able to deduct business costs from their taxes and will have less chance of being audited because they are an incorporated business. Regarding social security tax deductions, they will be based on the salary that the incorporated business owner receives. This will save them money and they will be able to deduct the benefits that they pay their employees from tax as well.
Incorporated businesses also protect the personal assets of the owner if the business enters financial difficulties. Business owners are offered the opportunity to not take a salary, which may be taxed, but rather to take an income in the form of dividends. This will offer the flexibility to choose their income and navigate around tax implications. Having a business become a US incorporation also provides a more professional and trustworthy surface view. Customers see the business as a more credible source and they are taken more seriously. Because of this, incorporated businesses are able to have tax benefits and have more access to lucrative opportunities.
In October of this year, the G20 will meet again to discuss the new system further. Many countries have been given the task to choose whether they will accept and implement the new tax system or not. The G20 will also address the EU's plan to tax digital services as they aim to potentially exploit a weaker UK. This may benefit the US seeing that ecommerce entrepreneurs will likely avoid Europe due to its tax policies.