How the Global Minimum Tax Impacts US and Canadian Taxpayers: What You Need to Know

 In a major step towards global tax reform, over 130 countries, including the US and Canada, have agreed to adopt a global minimum tax (GMT) aimed at preventing large multinational corporations from exploiting low-tax jurisdictions. This move has been lauded as a significant development in curbing tax avoidance and ensuring that corporations pay a fair share in the countries they operate. However, the impact of the GMT isn’t limited to multinational corporations—it also has implications for US and Canadian taxpayers.

What is the Global Minimum Tax?

The GMT is a 15% minimum tax rate on the profits of multinational companies with revenues exceeding 750 million euros (about $850 million). It aims to prevent corporations from shifting profits to countries with low or zero corporate tax rates, often at the expense of nations where these companies have substantial business activities. The OECD, in collaboration with the G20, has spearheaded this effort to modernize global tax systems in response to digitalization and globalization trends.

How the GMT Affects the US and Canadian Tax Systems

The US and Canada both support the GMT framework, which they believe will encourage fairer tax competition and improve national revenues. Each country has its own existing corporate tax structures, but the GMT will likely prompt legislative adjustments to ensure alignment with the new global standards.

1. For the US: The US has been proactive in combating tax avoidance and has implemented its own minimum tax on foreign profits through the Global Intangible Low-Taxed Income (GILTI) provision. However, the GMT will likely influence the Biden administration to adjust GILTI rates and mechanisms to align with the 15% rate. US corporations may also be more incentivized to keep profits within the US rather than shifting them to tax havens.

2. For Canada: Canada’s tax policy hasn’t been as aggressive as the US in targeting global tax avoidance, but the GMT may push Canadian policymakers to increase corporate tax rates on foreign profits. Canada may implement a top-up tax to ensure companies pay the minimum 15% on profits earned within its jurisdiction, which could indirectly boost national tax revenues.

Implications for Individual Taxpayers in the US and Canada

Although the GMT is primarily focused on large corporations, it does have trickle-down effects on individual taxpayers in both countries.

1. Higher Corporate Tax Revenues May Offset Tax Burden: If the GMT works as intended, multinational corporations will pay higher taxes in the countries where they generate revenue. This increase in corporate tax revenue could provide US and Canadian governments with additional funds to finance public projects, potentially reducing the need to raise individual tax rates or cutting existing tax benefits for individuals.

2. Corporate Cost Increases Could Influence Prices: As companies face higher tax liabilities, some may seek to offset this by increasing the prices of goods and services, especially in sectors with large multinational corporations. This could indirectly affect consumers in both countries, although the degree to which companies pass on these costs may vary by industry.

3. Potential Impact on Employment: Higher tax obligations could influence corporate decisions around business operations and investments. In worst-case scenarios, some companies might opt to scale back on investments or hiring within high-tax jurisdictions. This could potentially affect job opportunities in sectors with a heavy presence of multinational corporations, though the GMT's broader economic effects are still speculative at this stage.

Compliance and Tax Reporting Changes

Both the US and Canada are likely to increase their scrutiny on corporate tax compliance to meet GMT guidelines. This heightened enforcement could lead to more rigorous reporting standards and disclosure requirements for corporations operating globally. While this may not directly impact individual taxpayers, it may set a precedent for broader tax reform, potentially tightening reporting requirements for high-income individuals with international investments.

Conclusion: A Complex but Necessary Reform

The Global Minimum Tax is a transformative measure that could reshape the global tax landscape. For US and Canadian taxpayers, the GMT may have both direct and indirect impacts—potentially offsetting individual tax burdens through increased corporate tax revenue, while also influencing the cost of goods and services and, possibly, employment patterns in certain sectors.

The success of the GMT, however, will depend on effective enforcement and alignment across countries. In the long term, it aims to level the playing field for businesses and create a fairer global economy, one where both corporations and individual taxpayers contribute to the economic growth of their respective nations.

For more information visit The Accounting and Tax.