Frankfurt, Germany More than 130 countries have entered into an agreement on significant changes to the taxation of large global corporations.
The goal: to prevent multinational corporations from amassing profits in countries that pay little or no taxes – so-called tax havens.
The comprehensive agreement was signed on Friday by 136 countries after talks led by the Organization for Economic Cooperation 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 tax of at least 15%, a major initiative of US President Joe Biden and Treasury Secretary Janet Yellen. Yellen said the minimum tax would end decades of a “race to the bottom” that led to lower corporate tax rates as tax havens sought to lure companies that benefit from lower rates — but rarely do business in those locations.
Here’s a look at the key aspects of the deal:
What is the problem being addressed?
In today’s economy, multinational corporations are making increasing profits from intangible assets such as brands and intellectual property. It is easily transferable and global companies can allocate the profits they generate to a subsidiary in a country at very low tax rates.
Some countries compete for revenue at very low tax rates to attract businesses and attract huge tax bases that generate significant revenue even when tax rates just above zero are applied. 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, Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland. By one estimate, this costs the US Treasury $100 billion annually.
How will the global minimum tax work?
The basic idea is simple: Countries will adopt a minimum global corporate tax rate of at least 15% for very large companies with annual sales of more than 750 billion euros ($864 billion).
Then, if companies make untaxed profits or are subject to low taxes in one of the world’s tax havens, their home country will impose an additional 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. For the same reason, the minimum rate also applies if individual tax havens are not included.
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 locations that do not have a physical presence. This can be done through online retail stores or advertisements. 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 avoids trade disputes with Washington, which claims that such taxes have unduly harmed American companies and has threatened retaliatory action with new tariffs.
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 and leaves a lot of potential tax revenue on the table. 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.
The United Nations High Level Committee on International Financial Accountability, Transparency and Integrity recommended a rate of at least 20-30%. In a report released earlier this year, the commission said that a very low interest rate could induce countries to cut interest rates in order to remain competitive.
The countries that participated in the talks but did not sign the agreement are Kenya, Nigeria, Pakistan and Sri Lanka.
What role does the United States play in the agreement?
Biden’s tax agenda is stuck in negotiations among Democratic lawmakers, with the scale of his spending and proposed interest rate hike still under discussion. But the government made its claim by saying it should raise the global minimum tax in the US to encourage other countries to do so.
Biden withdrew somewhat from his original proposals when Congress made his contribution. The latest plan of the Ways and Means Committee will raise the minimum global tax rate from 10.5% to approximately 16.5%. The president originally wanted 21% as the minimum for the global average for the United States. Domestic corporate income is taxed at 26.5% compared to the current 21%.
The United States’ participation in the Minimum Tax Treaty is vital simply because it has so many multinational corporations. A complete rejection of Biden’s global floor proposal would seriously undermine the international agreement.
Eliminating digital unilateral taxes (DST) would provide a “very strong incentive” for the United States to participate, said Manal Corwin, tax director at professional services firm KPMG and a former tax employee in the Obama administration. Because the agreement prevents a destructive trade conflict that may spill over to independent firms in other economic sectors.
“In the case of repeated threats of tariffs, companies that are in the crosshairs of the topic discussed are not necessarily subject to tariffs. Daylight saving time today and tomorrow can be another one-sided measure,” she said. International taxation needs stability and alignment “to encourage investment and growth.. .(T) The collapse of the global consensus when daylight saving time begins could extend to other things.”
How will the agreement enter into force?
The deal goes to the leaders of the Group of Twenty. There will likely be an agreement as all 20 members signed the agreement on Friday. Then the implementation goes to each country separately.
Corporate income tax, as companies do not have a physical presence, requires countries to sign an intergovernmental agreement in 2022, which will take effect in 2023 development. If the US and European countries where most multinational corporations are based adopted such minimum rules, it would have much of the intended effect.
Associated Press writer Joshua Bock in Washington contributed to this report.
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