More than 130 nations have come to an agreement on major changes to how large global corporations are taxed. The aim is to stop multinational corporations from storing profits in countries that pay a low or no tax, or are referred to as tax havens.
The comprehensive agreement was signed on Friday by 136 nations after discussions facilitated by the Organization for Economic Cooperation and Development. It will update the last century of international taxation laws to accommodate technological advances and globalization.
The most crucial aspect: the global minimum tax of 15%, an important initiative being pushed through by U.S. President Joe Biden as well as Treasury Secretary Janet Yellen. Yellen stated that the minimum tax would end an era-long “race to the bottom,” which has seen corporate tax rates drop as tax havens tried to lure corporations that take advantage of lower rates but have little business in these locations.
WHAT PROBLEM DOES IT ADDRESS?
In the world of business the world, multinational corporations are increasingly likely to make profits from intangibles like trademarks, intellectual properties, and other intangible assets. These are often easily transferred, and multinational companies are able to give the income they earn to a subsidiary located in countries in which tax rates are low.
Certain countries compete for revenue through the use of low rates to attract companies by attracting large tax bases that produce huge profits, even if tax rates are only slightly above zero are being applied. Between 1985 1985 and 2018, the world’s average headline rate for corporates fell from 49 percent to 24 percent. In 2016, nearly half of U.S. corporate profits were reported in seven tax safe havens: Bermuda and the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore, and Switzerland. The cost an estimated to be U.S. Treasury $100 billion annually, according to one estimate.
HOW WOULD A GLOBAL MINIMUM TAX WORK?
The idea behind it is straightforward. The basic idea is: countries should adopt a global minimum company tax rate 15% for the largest firms, including those with annual revenue of more than the amount of 750 million euros ($864 million).
If companies earn income that is not taxed or are taxed lightly within one of the tax-paying countries, then their country of residence could impose a top-up tax that would increase the tax rate to 15 15%.
This would render it useless for a company to make use of tax havens since the taxes evaded in the havens will be paid at home. In the same way, it implies that the minimum tax rate will continue to apply even if tax havens for individuals do not participate.
HOW WOULD THE TAX PLAN ADDRESS THE DIGITALIZED ECONOMY?
The proposal would also allow countries to tax a part of the profits of 100 or so of the largest multinationals when they conduct business in countries where they do not have a physical presence. This could include online retailing or even advertising. Taxes would only apply to the portion of profit over a 10% profit margin.
In exchange, other countries will eliminate their own digital service taxes for U.S. technological giants like Google, Facebook, and Amazon. This would end trade wars with Washington, which claims that such taxes unfairly are a threat to U.S. companies and has threatened to respond by imposing new tariffs.
DOES EVERYONE LIKE THE DEAL?
Certain countries in the developing world and advocacy groups like Oxfam and the British-based Tax Justice Network say the 15% rate is far too small and leaves a lot of tax revenue potential on the open. While the global minimum could generate about 150 billion dollars in additional revenues for governments but the majority of that would be allocated to wealthy nations because they are the places where the biggest multinationals have their headquarters.
A 20-30 percent minimum is recommended by the high-level UN panel for International Financial Accountability and Transparency, and Integrity. In a document released earlier in the year, it noted that a rate too low will encourage nations to reduce their rates in order to stay competitive.
The countries that took part in the negotiations but didn’t sign the agreement included Kenya, Nigeria, Pakistan, and Sri Lanka.
WHAT IS THE U.S. ROLE IN THE AGREEMENT?
Biden’s tax policy is stalled in negotiations with Democratic lawmakers because the extent of his spending and his proposed rate hikes remain under discussion. However, the administration has made an argument it has to expand its U.S. global minimum tax to persuade other nations to follow suit.
Biden has been a bit more cautious about his original proposals now that Congress has offered its input. The latest proposal from the House Ways and Means Committee will increase the global minimum tax rate to around 16.5 percent, up from 10.5 percent. The president originally was looking for 21% to be a U.S. global minimum rate. Corporate income earned in the United States will be taxed at 26.5 percent, which is an increase from the current 21% rate.
U.S. participation in the minimum tax agreement is vital, as a lot of multinational companies are headquartered there. A complete rejection of Biden’s global minimum plan could severely undermine the international agreement.
Manal Corwin, who is a tax director at the professional services firm KPMG and an ex-Treasury Department official in the Obama administration, has said that the elimination of unilateral digital taxes, also known as DSTs, could be “a very strong motivation” for the U.S. to participate. This is because the deal could stop a damaging trade war that could extend to non-related businesses across other areas of the economy.
“When you get into back-and-forth threats of tariffs, the tariffs are not necessarily imposed on the companies that are in the crosshairs of the issue being debated,” she explained. “It may be DSTs today, and then tomorrow it’s some other unilateral measure.” She added that international taxation must be stable and agreement “to encourage investment and growth …. (T)he unravelling of global consensus, if it starts with DSTs, can expand to other things.”
HOW WOULD THE AGREEMENT TAKE EFFECT?
The deal will be passed on to the group consisting of 20 leaders. There is a chance of agreement because all 20 members accepted the deal on Friday. Implementation will then be shifted to different nations.
The tax on earnings when businesses do not have physical presence will require the nations to sign an intergovernmental treaty in 2022. It will be in effect, and then implement it in 2023. Global minimums could be imposed by each country using the model rules created in the OECD. Should the U.S. and European countries, which are home to the majority of multinational corporations, have laws governing minimums, that could have a large part of the desired effect.
