Baker McKenzie: New year, new burden: the global minimum tax is here

The global minimum tax was created as a response to the harmful and unsustainable tax competition arising as a result of tax optimization. Its publication is, without exaggeration, the most significant development in international taxation in the last fifty years.

As a general rule, taxation is linked to the physical presence of the company or management. This presence – the tax liability – can be easily changed at the international level, and accordingly, individual countries wanted to attract companies with tax reductions. At the same time, digitalization no longer requires a physical presence either, so income can be regrouped more and more easily in countries with lower tax rates. As a result, the corporate tax rate worldwide was significantly reduced by half to a third, and all affected budgets lost significant tax revenues. According to OECD statistics, the global average of corporate tax rates fell from 32.5% to 23.9% between 2000 and 2018.

International taxation is currently based on various bilateral agreements to avoid double taxation – Hungary has also concluded hundreds of such agreements. By the 2010s, the negative spiral of increasing tax competition made this system unsustainable, and a paradigm shift was needed.