130 countries around the world – including mostly China and India – have agreed on a minimum corporate tax rate of 15% to prevent what Treasury Secretary Janet Yellen called “self-destructive international tax competition”.
Why it matters: Companies must pay taxes of at least 15% regardless of where in the world they operate. The OECD framework, which was agreed on Thursday but has been in the works for many years, provides penalties for companies and jurisdictions that attempt to circumvent the rule.
The big picture: Businesses have become experts in focusing their profits in jurisdictions with low or zero corporate tax rates. (Switzerland, Ireland and the Netherlands are all popular.) This completely legal tax ploy will become significantly less attractive once this agreement comes into force.
How it works: The minimum tax applies to large multinational companies. Any profitable company with sales in excess of 20 billion euros ($ 24 billion) is included from the start, with that number expected to drop to 10 billion euros ($ 12 billion).
What’s next: The regulations will be implemented in national law in 2022 and come into force in 2023.
The bottom line: Companies retain a wide range of leeway when paying taxes; they just won’t have as much freedom as they currently have over whether to pay taxes.