US companies get an extra year to comply with global minimum tax

Large US companies will now have an additional year before they’re subject to the 15% global minimum tax. Negotiations between the Treasury Department and the Organization for Economic Cooperation and Development (OECD) resulted in an agreement that meant US companies wouldn’t be liable for the GMT until 2026, the Wall Street Journal reported.

The US is one of around 140 countries and jurisdictions that agreed to a deal to set a global minimum tax in late 2021. Companies with annual revenues of 750 million euros (about $840 million) or more in two out of four fiscal years would be subject to the tax in the country where the revenue is generated. The Treasury and other negotiators believed the deal could forestall tax dodges and prevent a “race to the bottom” in which countries set low corporate tax rates to attract investments.

According to the deal’s Undertaxed Profits Rule, a country could levy additional taxes on a foreign company doing business within its borders that paid less than 15% in taxes. For example, if a company from Country X, which has a 10% corporate tax rate, does business in Country Z, Country Z could charge it an additional 5% in “top-up” taxes to meet the global minimum.

“This creates a strong incentive for countries to adopt similar rules, so they don’t forgo tax revenues,” Brad Elphick, partner, and Peter Lawrence, director of public policy and government relations, both at Novogradac Consulting, wrote in a recent research note.

The Undertaxed Profits Rule goes into effect in 2025. Following the negotiations, though, companies in countries with a corporate tax rate of at least 20% won’t be subject to the rule until 2026. That includes the US, which has a 21% corporate tax rate.

“It made sense to create a safe harbor to give jurisdictions with different legislative processes time to adapt,” Manal Corwin, director of the OECD Centre for Tax Policy and Administration, told the Wall Street Journal.