A LANDMARK global agreement that will establish a 15-percent minimum corporate income tax rate in at least 136 countries presents a great opportunity for the Philippines, provided the agreement comes into force in 2023 as scheduled.
The Organization for Economic Cooperation and Development (OECD) announced that the agreement had been signed on October 8. The initiative spearheaded by the OECD was strongly supported by the US and the European Union, as it is their corporations that make the biggest use of tax havens around the world.
The agreement will now have to be ratified by the individual countries that signed it, as well as any others who wish to join the pact. In many cases, countries will also have to pass new legislation to make adjustments to their existing corporate income tax rates if they are below the 15-percent minimum.
The main feature of the tax agreement is that companies will pay corporate income tax everywhere they do business, rather than just in the countries where their headquarters are listed. The manner in which tax obligations will be divided among countries still has to be worked out, but presumably will be based on the amount of revenue earned by a company in different markets.
The key features of the agreement include some compromises necessary to secure the signatures of some low-tax countries such as Ireland and Hungary. The 15-percent minimum rate cannot be raised, and the provisions of the agreement are intended to apply only to businesses with more than 750 million euros (about $869 million) in annual revenues, in order to protect smaller businesses. The target date for implementation was also moved up to 2023 to allow governments time to impose the required measures more gradually.
Naturally, the agreement has been the subject of a great deal of criticism. Corporate interests have complained that the deal will make accounting significantly more complicated and raise costs, while lower-income countries, particularly those that have benefited the most from being tax havens, have complained that the agreement unfairly benefits rich countries such as the US. Activists have also ridiculed the 15-percent rate as "too low," suggesting that it should be at least 25 percent.
Direction for policymakers
All those arguments do have some validity but are outweighed by the broad advantages the corporate minimum tax will provide. It does not exactly eliminate the concept of a tax haven, but levels the playing field among countries that seek to attract corporate locators with low taxes. For the 33 countries (as of the end of 2020) that currently have corporate income tax rates of 15 percent or below, they will have to find other competitive advantages to attract business locators. This is where the new tax agreement presents an opportunity for the Philippines.
From a corporate point of view, the only real advantage to locating its headquarters in a country with the minimum tax rate or at least a significantly lower tax rate than its actual home country is if the host country offers some other benefits, the biggest one of which would be a local market where any revenue earned by the company would be taxed at a lower rate, thus reducing its exposure to some degree to higher taxes in other markets. Other factors such as lower costs, a stable regulatory environment, good local labor pool, and an overall pleasant environment for employees who would relocate to the country would all be value-added factors as well.
Although the Philippines' corporate tax rate of 25 percent is well above the 15-percent minimum, it is still lower than most of the developed countries, and the Philippines offers many of the advantages described above. Granted, there are many areas in need of improvement in the Philippines' economic and regulatory environment, but the creation and implications of the corporate minimum tax provides some guidance and direction to policymakers for making those improvements.