A global minimum tax could cost Canada billions

In December, the OECD issued model rules for its 15 per cent global minimum tax. The rules put tax havens - the countries that have helped large corporations avoid tax first in line to charge the tax, an astonishing development. If the OECD goes up on its offer, Canada s revenue could be reduced from $3.5 billion annually to little more than pocket change.

The tax revenue loss of US $150 billion is caused by large corporations shifting billions of dollars of profits to tax havens every year. More than 135 countries representing 95 per cent of global GDP agreed to a 15 percent minimum tax last year, despite the fact that the OECD has been talking about ways to address this tax avoidance for years. The tax will apply to multinational groups with annual gross revenue of at least €750 million about C $1 billion and is expected to take effect in 2023. We apologize, but this video didn't load.

Click here to see other videos from our team. If you refresh your browser, or Allan Lanthier: The Anti-tax haven law is a windfall for tax havens Under the original framework, Canadian corporations with foreign subsidiaries would no longer be able to escape tax on offshore income. The Canadian parent would owe 15 per cent of the subsidiaries' annual profit, less whatever foreign tax the subsidiaries may have paid — the difference being the so-called top-up tax, which was widely assumed to go to Ottawa.

The Canadian government was a supporter of the initiative and was delighted when a global deal was reached. Finance Minister Chrystia Freeland said that Canada's share of the pie would be additional tax revenue of $3.5 billion, an amount that would come in handy in an interview with CBC News. Ms. Freeland said that there was a social safety net that costs money. In her interview with CBC, the finance minister seemed to revel in the cash bonanza for her government. She took the opportunity to take a swipe at big business, which is the sector that accounts for more than 40 per cent of private sector jobs in Canada. She said that the deal is only a loser for big multinational companies that are currently using globalization and the loopholes it has created to avoid paying taxes.

In late December, the OECD issued a 70-sided package with brutally complex model rules that countries such as Canada can use to implement the tax. In a surprise development, the rules give tax havens a first crack at cash by using a new domestic top-up tax the country where the foreign parent company is located is now second in line. Tax havens that don't have an income tax can charge and keep the tax they helped firms avoid, including tax havens that don't have an income tax. More On This Topic Switzerland, a country that has been under fire for years for offering sweetheart deals to large corporations, was one of the first out of the gate. Switzerland will charge the domestic top-up tax, according to the Swiss finance minister. If 15 per cent is going to be levied, we want to levy that in Switzerland, he said. Around 2,000 Swiss subsidiaries of foreign parents will be affected by the move. The countries where the foreign parents are based won't receive a dime.

The United Kingdom is one of the countries that announced it will apply the domestic top-up tax, which is surprising considering that the U.K. has a 19 per cent corporate tax rate that is going to rise to 25 per cent in 2023. The U.K. imposed a tax on its corporate tax rate, which is only 10 per cent, based on income derived from patents and other intellectual property. The Chancellor of Exchequer stated that ensuring large multinational groups pay the right tax in the right place has been a long-standing priority for the U.K., with no mention of the fact that the tax coffers of other countries will take a beating as a result. It depends on what tax havens such as Barbados and the Cayman Islands decide to do. There is a strong incentive for countries to introduce a domestic top-up tax of their own. The minimum tax was supposed to reduce tax competition between countries. These new model rules don't do anything but. We shall see how all this plays out over the coming months as the OECD says it will issue a commentary on the rules in early 2022. The OECD is in a way over its head and that is the only thing that seems certain. Allan Lanthier is a retired partner at an international accounting firm and has been an advisor to both the Department of Finance and the Canada Revenue Agency.