Global Minimum Tax Rate Faces Uncertainty as EU States Reconsider Positions, Warns Malta's Finance Minister

Global Minimum Tax Initiative Under Threat

The international agreement for a 15% global minimum corporate tax rate, a cornerstone of efforts to curb profit shifting by multinational enterprises, is facing significant challenges, according to Malta's Finance Minister Clyde Caruana. Speaking recently, Caruana warned that the initiative, once hailed as a global movement, is now 'fractured' as several European Union member states reconsider their positions.

The global minimum tax, known as Pillar Two of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), aims to ensure that large multinational companies with annual revenues exceeding €750 million pay at least a 15% tax rate, regardless of where they operate. This measure was designed to prevent a 'race to the bottom' in tax competition and encourage companies to pay their fair share in the countries where they conduct business.

Malta's Cautious Stance Amid Shifting Landscape

Minister Caruana highlighted that 'the goalposts have changed,' noting that what began as a unified global effort no longer enjoys universal backing. Malta, which initially resisted the proposals due to its favorable tax regime, eventually agreed to the directive but secured a derogation allowing it to delay implementation by up to six years. Malta's current tax system, while having an official corporate tax rate of 35%, often results in an effective rate of around 5% for many multinationals through refund mechanisms, making it a significant draw for foreign investors.

Caruana indicated that approximately 700 companies in Malta could be affected by the reform. He has adopted a 'wait-and-see' approach, closely monitoring developments before outlining Malta's definitive stance.

EU Member States Express Reservations

The Maltese Finance Minister revealed that a recent meeting of EU finance ministers saw as many as 10 member states voicing serious concerns about the global minimum tax. These countries are reportedly pushing for revisions to the rules, particularly in light of the United States' withdrawal from the agreement.

Reports suggest that smaller EU economies, including Hungary, Slovakia, and the Baltic states, are leading the charge to dilute or delay the implementation of the rules. Their primary concern is that the 15% minimum tax could diminish their ability to attract foreign investment, a crucial aspect of their economic strategies.

Impact of US Position and Future Outlook

The shift in the US position, particularly after Republicans regained influence and the reported withdrawal under Donald Trump, has been a critical factor in the unraveling consensus. The US, initially a strong proponent of the initiative, is now set to grant a 'safe harbour' clause to its companies from December, exempting them from certain rules. Caruana warned that this US stance could lead other major economies, such as India and China, to follow suit, further fragmenting the global effort.

The EU had adopted a directive in December 2022, obliging member states to transpose the Pillar Two rules into national law by the end of 2023. However, with growing dissent, the future of a universally applied global minimum tax remains uncertain, with the EU expected to clarify its position by mid-2026.