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Five Countries That Will Be Most Affected By Global Minimum Tax

In early April, United States Treasury Secretary Janet Yellen called for countries worldwide to adopt a 21% minimum corporate tax rate. Yellen’s proposal came days after U.S. President Joe Biden unveiled a $2 trillion infrastructure plan. As part of the spending plan, the Biden administration would raise the national corporate tax rate to 28% from 21%.

Critics of raising the U.S. corporate tax rate say that a hike will force companies to flee for lower-taxed countries, costing the U.S. jobs and tax revenue. Yellen’s proposal intends to even the playing field, so companies have less incentive to move into countries with low tax rates. 

Global Minimum Tax and the Race to the Bottom

Proponents have been calling for a global minimum tax for years—especially as countries across the world have consistently lowered their tax rates over the past decades.  

The world’s average corporate tax rate was 49% in 1985. The global average fell to 23% in 2019. In 2017, the United States lowered its own corporate tax rate to 21% from 35%—the highest rate in the world at that time. 

Countries decrease their tax rates to make themselves appealing to foreign companies seeking business-friendly markets for global expansion. This financial strategy  is called the “race to the bottom.”

Critics say that the race to the bottom deprives countries of much-needed tax revenue. When companies claim most of their income in tax-friendly countries, they pay less tax in countries with higher rates. As a result, countries seeking more foreign investment must lower their tax rates to remain competitive. 

The International Monetary Fund says that world governments lose about $500 billion per year due to companies claiming their profits in lesser-taxed countries. The U.S. alone misses out on $100 billion in tax revenue each year, while the United Kingdom loses $25 billion annually

Critics of a global minimum tax say that corporations would simply pay their workers less to account for their higher taxes. Others say a minimum tax would deprive developing countries of a means to lure overseas businesses, decreasing their global economic competitiveness.  

Which Countries Would Be Most Affected by Global Minimum Tax?

Lower-income countries are not alone in using low corporate tax rates to attract foreign investment. These five developed nations have some of the world’s lowest tax rates—and would be most affected by a global minimum tax. 

1. Hungary

Hungary has the lowest corporate tax rate in Europe (9%) and one of the lowest worldwide. In January 2017, Prime Minister Viktor Orban reduced the country’s rate to 9% from 19% to draw more foreign investment. 

Just over four years later, it’s no surprise that Hungary resists the idea of global minimum tax. Hungary’s State Secretary for Tax Affairs, Norbert Izer, called Yellen’s proposal a “violation of sovereignty.” Izer said that Hungary would “not consent to any solution that makes life more difficult for local businesses or reduces the financial sovereignty of the Hungarian state.” 

2. Ireland

Ireland is a renowned business center thanks to its proximity to other European Union (EU) commercial hubs and its 12.5% corporate tax rate—the second-lowest in Europe. The low tax rate helps Ireland attract many of the world’s biggest multinational companies, from tech giants like Intel and Microsoft to drugmakers like Pfizer and Merck. 

While many of the world’s economies contracted during the first year of the COVID-19 pandemic, Ireland was one of the few to see GDP growth. The strong performance was fueled by Ireland’s plethora of tech and pharmaceutical companies, which thrived despite the global economic downturn. 

 3. Canada

Canada’s 15% corporate tax rate draws businesses that want to maintain a North American presence without paying higher taxes in the U.S. While low taxes help Canada compete with the U.S. for overseas investment, the country is enthusiastic about a standard worldwide tax rate.

Canadian Finance Minister Chyrstia Freeland says her country backs Yellen’s proposal. “In terms of economic thinking, our government is well-aligned with Janet Yellen and the Biden administration,” Freeland said. “I am a big believer in multilateral action, and I am very encouraged by the conversations around it.” 

4. Hong Kong

Boasting a corporate tax rate of 16.5%, Hong Kong is a global commerce hub with business-friendly taxation and economic policies. As recently as March, Hong Kong’s Chief Secretary for Administration told foreign investors that “very low tax in Hong Kong is assured” into the future. Yellen’s proposal, however, threatens Hong Kong’s tax-friendly status. 

International companies would still find incentives to expand into Hong Kong if the country complied with a global minimum tax. Hong Kong’s tax code is simple, so foreign companies quickly determine and pay what they owe. The country does not require taxes on capital gains, dividends, or sales. Additional benefits of doing business in Hong Kong include strong legal protection for companies and being part of an internationally renowned financial center. 

5. Singapore

Like Hong Kong, Singapore is widely regarded as one of the world’s most pro-businesscountries. Though Singapore’s 17% corporate tax rate contributes to its appeal, Singapore will remain an attractive expansion destination even if the rate is raised. 

Singapore has user-friendly business requirements, meaning it’s easy for international companies to operate in the country compliantly. It’s also home to some of the world’s most prominent high-tech companies and a thriving startup culture. The country offers numerous grants, loans, and incentives for foreign businesses, adding to its reputation as a hub for the world’s most innovative companies. 

Take a Strategic Approach to Expansion With Velocity Global

Gaining consensus for a global minimum tax will not be easy, as exemplified by resistance from countries like Hungary. However, G-20 countries are optimistic they will settle on a global minimum tax rate by the middle of 2021. Companies considering international expansion must track the situation to understand how changes to foreign tax rates impact their economic viability in new markets. Velocity Global is here to help.

Velocity Global has guided hundreds of companies through every stage of the global growth process. From consulting on strategy to ensuring tax compliance in new markets, Velocity Global is a one-stop solution for companies extending their international reach. Contact us today to find out how our expertise can aid your overseas growth.

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