How does the G20 subsidized minimum corporate tax work?

Rome (AFP) – Leaders of the Group of Twenty summit in Rome expressed broad support for sweeping changes to taxes imposed on major global companies.

The goal: to prevent multinationals from amassing profits in countries with little or no tax – so-called tax havens.

The proposal was finalized in October by 136 countries and sent to the G20 for final consideration of the complex discussions led by the Organization for Economic Co-operation and Development. It will modernize centuries-old international tax regulations to keep pace with the changes brought about by digitalization and globalization.

The most important feature: a global minimum tax of at least 15%, a major initiative of US President Joe Biden. “This is more than just a tax deal,” Biden said in a tweet from the summit on Saturday. “It is diplomacy that is reshaping our global economy and serving our people.”

Treasury Secretary Janet Yellen said she would end a decade-long “race to the bottom” of low corporate tax rates as tax havens sought to lure smart accounting firms to take advantage of low rates in countries with little real activity.

Here is an overview of the most important aspects of the tax deal:

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What is the problem?

In today’s economy, multinational corporations can make significant profits from things like trademarks and intellectual property that can be easily removed from factories. Companies can allocate their profits to a subsidiary in a country with very low tax rates.

Some countries compete for revenue using very low tax rates to attract business and attract huge tax bases that generate significant revenue even at tax rates just above zero. Between 1985 and 2018, the global average of corporate addresses fell from 49% to 24%. As of 2016, more than half of all US corporate profits were recorded in seven tax havens: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland. White House officials say the global minimum could translate to nearly $60 billion in US tax revenue.

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How does the global minimum tax work?

The basic idea is simple: countries will enact a minimum rate of at least 15% for very large companies with annual sales of more than 750 million euros (864 million US dollars).

If a company’s profits are not taxed or even slightly taxed in one of the world’s tax havens, their country imposes an increased tax that raises the rate to 15%.

This will make it impossible for the company to use tax havens as the taxes avoided at the port will be collected locally.

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How will the tax plan address the digital economy?

The plan would also allow states to tax some of the profits of roughly the 100 largest multinationals when they do business in places where they don’t have a physical presence, such as online retail stores or advertising. The tax is only levied on the share of profits in excess of the 10% profit margin.

In return, other countries will eliminate unilateral digital services taxes imposed by US tech giants such as Google, Facebook and Amazon. This will avoid trade disputes with Washington over the claim that such taxes wrongly target US companies.

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What role does the United States play in the agreement?

Biden insisted that the United States should join the global minimum tax in order to persuade other countries to do so. This would include increasing the current foreign income rate by 10.5% to reflect the global minimum. His tax proposals are still being negotiated in Congress.

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US participation in the minimum tax agreement is vital simply because it has so many multinationals – 28% of the world’s largest in 2000. A complete rejection of Biden’s global minimum would seriously undermine the international deal.

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Does everyone like the show?

Some developing countries and stakeholders such as Oxfam and the UK-based Tax Justice Network say the 15% rate is too low. Although the global bottom line would bring governments about $150 billion in new revenue, most of that would go to rich countries because that’s where many of the biggest multinationals are located. Developing countries participated in the talks and all of them signed except Nigeria, Kenya, Pakistan and Sri Lanka.

US critics, including Republican leaders and some business groups, say the proposed minimum tax will make America less competitive and potentially cost jobs, and point out that the key is to get transit from other countries so the US is not at a disadvantage.

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Which of the other caves?

The research consortium EU Tax Monitor warns that exemptions for companies with physical assets and employees in a particular country “could intensify tax competition by providing incentives for companies to move real activities to tax havens”.

This means that tax competition between countries will still be possible when there is actual business activity – unlike vulgar accounting.

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How will the agreement enter into force?

The support provided by the G20 Heads of State and Government complements a long-term negotiation process. Once the approval is reflected in the summit’s final declaration expected on Sunday, implementation will then be transferred to the individual countries.

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Corporate income tax, in which there is no physical presence of companies, requires countries to sign an intergovernmental agreement in 2022, which will be implemented in 2023. The global minimum can be applied by individual countries based on the OECD Model Rules. If the US and European countries where most multinational corporations are based enact such minimums, it would have much of the intended effect, even if some tax havens do not.

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Associated Press writer Joshua Bock in Washington contributed to this report.

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