Introduction: What is a Top-Up Tax?
The Top-Up Tax is a key part of the OECD’s global tax reform, specifically under Pillar Two.
It is designed to ensure that multinational companies pay a minimum tax rate of 15% on their profits, even if they are operating in countries with lower tax rates.
The Top-Up Tax applies to profits that are taxed below the 15% threshold.
If a company is paying less than 15% tax in a particular country, the Top-Up Tax allows other countries to collect additional taxes to bring the total tax rate up to the minimum level.
How Does it Work?
Let’s say a company has a subsidiary in a country where the corporate tax rate is only 10%.
Under the Top-Up Tax rules, the company’s home country can impose an extra 5% tax on the profits earned in that country, making sure the company’s total tax rate meets the global minimum of 15%.
This system prevents companies from taking advantage of tax havens or countries with very low taxes, as they will always end up paying at least 15% on their profits, regardless of where those profits are earned.
Who Does the Top-Up Tax Affect?
The Top-Up Tax mainly affects large multinational companies with global revenues of more than €750 million.
Smaller companies that operate within one country are not impacted by this rule.
The tax is part of a broader effort by the OECD to reduce tax avoidance by multinational companies, which often shift their profits to low-tax jurisdictions to reduce their overall tax bills.
Why is this Important?
The Top-Up Tax is important because it helps create a fairer global tax system.
By ensuring that all large companies pay at least 15% tax on their profits, it reduces the incentive for companies to move their profits to tax havens or low-tax countries.
This tax reform is also expected to generate more revenue for governments, allowing them to fund important public services like healthcare, education, and infrastructure.
Conclusion: What is the Top-Up Tax?
The Top-Up Tax is a powerful tool in the fight against tax avoidance.
By ensuring that multinational companies pay a minimum tax rate of 15%, it helps create a fairer tax system and ensures that countries can collect the tax revenue they need to support their economies.
Final thoughts
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