After Global Minimum Corporate Tax — Next Steps for Modern Economies and Corporations

On June 5, 2021, the Group of Seven (G7) countries agreed to reform the global tax system and the primary target was to set a global minimum corporate tax rate.[1] Finance ministers announced it was a step to addressing the “race to the bottom on global taxation.”[2] The Organization for Economic Co-operation and Development (OECD) agreed on the global minimum corporate tax rate at 15 percent.[3] Despite initial pushback, countries known for corporate-friendly tax rates such as Ireland eventually joined the agreement,[4] totaling to 137 signatory countries.[5] These efforts are the first step to disincentivizing international corporations from selectively choosing tax-friendly countries. To meet 21st century realities of the digital and tech services economy, intellectual property (IP)-derived income should become the next target of reforms.

Current corporate tax rates vary heavily across countries,[6] a key factor in multinational corporations’ tax structuring. In 2020, the worldwide average corporate income tax rate was 23.85 percent, with highest at 36 percent and lowest at 5.5 percent.[7] The U.S. corporate income tax rate is capped at 21 percent,[8] compared to Ireland’s corporate tax rate of 12.5 percent.[9] Among many factors including language, political and social stability, and local population skillset,[10] Ireland has become an attractive location for American tech companies to incorporate in.[11] Unofficial estimates show Microsoft, Apple, and Pfizer’s taxes alone account for 30–40 percent of Ireland’s collected corporate tax.[12] By setting a floor of 15 percent through the OECD agreement, the minimum rate should technically discourage countries from incorporating abroad to lessen their taxes. 

One of the key tax issues that has yet to be addressed is IP-derived income. Governments recognize the importance of encouraging innovative activity by companies.[13] Countries now tax revenue derived from the general umbrella of IP — including patents and software copyrights — at a lower rate to encourage innovation.[14] Patent box regimes (lowered IP tax regimes) create lower effective tax rates on income derived from IP, and they have become widespread in Europe with rates as low as 0–2 percent, and high as 10 percent in 2020.[15]

The US and Ireland each have very different methods of taxing IP-derived income. Ireland’s Knowledge Development Box (KDB) is a corporate tax rate of 6.25 percent on income from qualifying assets, which requires the company to have created the asset from qualifying R&D activities.[16] The US created the foreign derived intangible income (FDII) rule, which taxes “income arising from U.S. taxpayers selling or licensing property, including IP, or providing services to foreigners” at a lower rate of 13.125 percent instead of 21 percent.[17] Despite these changes to IP-derived income in the US, Ireland’s KDB regime is still much more favorable.

Patent box tax regimes have shown to increase international transfers of patents into a jurisdiction; multinational corporations particularly respond to tax changes by transferring their patents.[18] Software and tech companies such as Microsoft, Apple, and Amazon are the very targets for these global tax reforms and their profits are much derived from their IP ownership. A possible area of reform would be to add restrictions to qualify for patent box regimes, such as requiring further development upon the IP take place within the country.[19] This could slow down international transfers of IP for the purpose of tax structuring and benefit the local jurisdiction more as R&D is encouraged to take place locally.

 Setting a minimum corporate tax to discourage tax avoidance is the first step towards global tax reform in the new age of global digital and internet services becoming some of the largest and most profitable services. If software and tech corporations are the target, then IP-derived income tax regimes should also eventually be reformed to meet the 21st century global economy.

Rosa Kim is a staff member of Fordham International Law Journal Volume XLV.

This is a student blog post and in no way represents the views of the Fordham International Law Journal.
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[1] See David Miliken & Kate Holton, Tech Giants and Tax Havens Targeted by Historic G7 Deal, Reuters (June 5, 2021), https://www.reuters.com/business/g7-nations-near-historic-deal-taxing-multinationals-2021-06-05/.

[2] Id.

[3] See OECD, Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy, Base Erosion and Profit Shifting Project 1, 4 (Oct. 8, 2021), https://www.oecd.org/tax/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-october-2021.pdf.

[4] See Silvia Amaro, Global Tax Deal Inches Closer as Holdout Ireland Agrees to Sign Up, CNBC (Oct. 7, 2021), https://www.cnbc.com/2021/10/07/ireland-corporate-tax-rate-.html.

[5] See OECD, supra note 3, page 1; Leigh Thomas & David Lawder, Explainer: What is a Global Minimum Tax and What Will it Mean?, Reuters (June 6, 2021), https://www.reuters.com/business/finance/what-is-global-minimum-tax-deal-what-will-it-mean-2021-10-08/.

[6] See generally Elke Asen, Corporate Tax Rates around the World, 2020, Tax Foundation (Dec. 9, 2020), https://taxfoundation.org/publications/corporate-tax-rates-around-the-world/.

[7] See id. The highest rate is 50 percent (Comoros), but it’s an outlier. The others are lower at 33 to 36 percent. See id.

[8] See Tax Cuts and Jobs Act of 2017 § 13001(b), 26 U.S.C. § 11(b).

[9] See PWC, Ireland: Corporate — Tax Credits and Incentives, PWC Tax Summaries (July 1, 2021), https://taxsummaries.pwc.com/ireland/corporate/tax-credits-and-incentives.

[10] See Lisa O’Carroll, Will Ireland’s Corporation Tax Rise See Tech Companies Leave Dublin?, The Guardian (Oct. 23, 2021), https://www.theguardian.com/world/2021/oct/23/will-irelands-corporation-tax-rise-see-tech-companies-leave-dublin.

[11] See id.

[12] See id.

[13] See Fabian Gaessler, Bronwyn H. Hall & Dietmar Harhoff, Should There be Lower Taxes on Patent Income? 2 (Nat’l Bureau Econ. Rsch. Working Series, Working Paper No. 24843, 2018), https://www.nber.org/system/files/working_papers/w24843/w24843.pdf. Existing standard practices include deducting research and development (R&D) expenses, corresponding accelerated depreciation, and R&D tax credits. See id.

[14] See id.

[15] See Elke Asen & Daniel Bunn, Patent Box Regimes in Europe, Tax Foundation (Nov. 26, 2020), https://taxfoundation.org/patent-box-regimes-in-europe-2020/.

[16] See Knowledge Development Box, Irish Tax and Customs, https://www.revenue.ie/en/companies-and-charities/reliefs-and-exemptions/knowledge-development-box-kdb/index.aspx (last visited Nov. 13, 2021).

[17] Larissa Neumann & Julia Ushakova-Stein, US Taxation of IP After Tax Reform, JD Supra (July 11, 2018), https://www.jdsupra.com/legalnews/us-taxation-of-ip-after-tax-reform-85282/.

[18] See Gaessler, Hall & Harhoff, supra note 13, at 32.

[19] See id.