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A Closer Look at the G20 Minimum Universal Corporate Tax and its Impact on Offshore Investments

During the July G20 meeting, the finance ministers of the world’s major economies agreed to push for the implementation of a minimum universal corporate tax. Once the planned global tax revision takes effect, corporate organizations can no longer take advantage of low tax rates of countries hosting offshore-based operations and financial investments, particularly, the so-called tax havens.

Members of the Group of Twenty (G20) countries have all agreed to revise international taxation by instituting a minimum 15% corporate income tax levy to make offshore investments less attractive to corporate organizations. Seen as a way to address a long standing global economic issue that has been affecting the financial stability of countries, the minimum international tax aims to defeat the main purpose of shifting profits to countries that offer low tax rates or in some cases, do not imposes tax at all.

Big corporate organizations across the globe have been using legal and accounting strategies to transfer their profits in tax havens where minimal or no tax is collected. This is regardless of whether the firm does actual business as a registered entity of the host country.

The earliest projected date of implementation is in the year 2023, albeit still dependent on the actions taken at national level, which include enacting legislation that would enforce the minimum tax requirement in their own jurisdictions. The proposed 15% rate is only the recommended minimum tax on corporate offshore earnings but can be greater if a country so chooses.

Ending the Era of International Tax Competitions

Janet Yellen, the new U.S. Treasury Secretary representing the U.S., remarked that the move would put an end to an era of international tax competition driven by countries that offer lower income tax to lure foreign companies. Ms Yellen described the tax competition as a self-defeating race, since no country actually wins. It merely deprives nations of resources needed for investing on people, on workforces and on infrastructure.

Between the years 2000-2018, it became common for major U.S. companies to book at least half of all their foreign profits in any of the seven popular tax havens, namely: Switzerland, Ireland, Luxembourg, the Netherlands, Singapore, Bermuda and the Cayman Islands,

The U.S. later imposed a 21% minimum tax on revenues gained from overseas operations and investments, which is more than enough to comply with the proposed minimum international tax.
Under the proposed minimum universal corporate tax, even if companies avoid paying the minimum corporate tax imposed by their home country, they will still be constrained to pay higher taxes in the countries hosting the offshore holdings.

The universal minimum corporate income tax once implemented will diminish, if not eliminate the incentives offered by tax havens. .

Although there are other aspects of the tax revision plan taken up in the G20 July summit, this article’s focus on forthcoming tax changes aims to raise awareness of investors who rely only on offshore investments. The implementation of the minimum universal tax will have a considerable impact on investment funds held in tax havens.

The Einvestment Fund for one, is a top-performing offshore investment fund held in the Cayman Islands, one of the most successful tax havens used for foreigh holdings. This jurisdiction does not levy taxes on both local and foreign income or revenues but instead earn revenues by collecting fees from financial transactions, business registrations and mostly from duties levied on imported goods.
In order to have a mutually beneficial relationship with other countries, The Cayman Islands will likely enter into treaties that signify cooperation with the proposed universal minimum corporate tax.