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In 2024, new tax rules and transparency mandates emerged, continuing a trend that is still generating future-impacting regulations. Multinational enterprises (MNEs) must reassess their structures, considering the immediate and future effects of this global tax policy shift. Readiness is key to prevent adverse consequences. This article addresses into the most recent global trends in tax policy and elucidates their implications for both SMEs and MNEs.
This article was written by Leticia de Moura and Dick Brinkhof. Leticia ( [email protected]) and Dick ([email protected]) are both part of RSM Netherlands International Tax Services Practice with a strong focus on International Tax.
In an era of rapidly changing global tax regulations, MNEs need not only to understand the worldwide implications for their operations but also to be aware of the jurisdiction-specific factors that can affect their business. This understanding is underscored by the significant changes in international tax policy in recent years. As we navigate these changes, it is increasingly clear that the future of tax policy will be shaped by a variety of factors, including the digital economy, environmental sustainability and global events.
Over the last two decades, corporate income tax (CIT) rates have steadily decreased and converged between jurisdictions, reaching historically low levels. As a result, jurisdictions are now more inclined to implement measures that reduce the tax base rather than cut rates further, as observed over the last eight years in the OECD's annual tax policy reform questionnaire . As a result, governments adopted Tax Policy reforms due to the need to raise revenues and stimulate investment. This motivation resonated with governments' efforts to stimulate the economy and reduce fiscal deficits after spending due to the COVID-19 pandemic. Many jurisdictions continued to increase their corporate tax incentives to encourage greater investment in innovative technologies and research and development. In high-income countries, tax incentives were also frequently used to minimize the effect of high energy prices on companies, especially small and medium-sized enterprises (SMEs).
Corporate tax reforms have also been used to deal with high profits reported by taxpayers in certain sectors. Many jurisdictions, particularly European ones, have introduced windfall taxes, levies or other penalising measures on companies that have produced outstanding profits due to the economic consequences of Russia's large-scale aggression against Ukraine, particularly in the energy sector. Also, environmentally related tax incentives have gained prominence, with governments promoting investment in low-emission technologies and green infrastructure.
These trends have had and will continue to have, a significant impact on both MNEs and SMEs. Changes in corporate tax rates (CIT) are no longer the primary influential shift for internationally active companies as they also should consider their investments, main profit drivers, and future compliance with environmental and technological standards. Finally, the introduction of the global minimum tax from Pillar Two has created a substantial compliance burden, that could potentially alter the structure of an internationally company.
The US approach
Following the trend around the world, in 2017 the United States Congress approved the Tax Cuts and Jobs Act (TCJA), a broad tax law that included significant changes to the US international corporate tax system. The TCJA reduced the headline CIT rate from 35 percent to 21 percent, while reforming the taxation of income earned abroad by US MNEs. These provisions bear similarities with certain rules under Pillar Two, yet there are specific areas where the TCJA and Pillar Two diverge. Pillar Two encompasses a safe harbour provision that will essentially shield the US from significant issues until December 31, 2026. However, post this date, any discrepancies between US regulations and Pillar Two rules could lead to increased compliance efforts and potential tax liabilities. TCJA's approach of reducing the CIT rate aimed to combat profit shifting together with base erosion provisions such as GILTI (Global Intangible Low-Taxed Income), FDII (Foreign-Derived Intangible Income), and BEAT (Base Erosion Anti-Abuse Tax).
As numerous foreign jurisdictions modify their tax codes to align with Pillar Two, the effects of GILTI, FDII, and BEAT will inevitably evolve.
The changes in tax policy around the world, particularly the implementation of measures like modifications in CIT tax rates, the adoption of the Two-Pillar Solution and the US TCJA approach, represent significant shifts in how multinational corporations are taxed. These changes are driven by a multitude of factors including digitalization, environmental sustainability, and global events and aim to address some of the challenges posed by the digital economy, promote fairness, and prevent tax avoidance. It is a whole domino effect that is reshaping the dynamic nature of the international tax policy
Forward-Thinking
As we look towards the future, the international tax policy is prepared for further transformation. The digitalization of the economy, the increasing importance of environmental sustainability, and the ongoing effects of global events such as the COVID-19 pandemic and geopolitical tensions will continue to shape tax reforms. MNEs will need to manage these changes with agility and foresight.
The implementation of Pillar Two and the continued efforts to combat base erosion and profit shifting, as well as the adoption of measures to support SMEs and encourage investment in environmentally friendly technologies, are just the beginning. We anticipate a future where tax policies will increasingly reflect the values of our global society, promoting not just economic growth, but also environmental sustainability and social equity.
The challenge for corporations will be to adapt to these changes while maintaining their competitiveness and profitability. Moreover, the new regulations will require MNEs to reassess their structures and consider the immediate and future effects of this global tax policy shift. The journey is complex, but with careful strategic planning, corporations can turn these challenges into opportunities for growth and innovation.
RSM is a thought leader in the field of International Tax and global tax policy. We offer frequent insights through training and sharing of thought leadership that is based on a detailed knowledge of global tax reforms, regulatory obligations, and practical applications in working with multinational corporations. If you want to delve deeper into the complexities of international tax policy in a constantly evolving world, please reach out to one of our consultants.
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