Corporate Tax

DECLARATION: How the G20 backed corporate minimal tax would work

ROME (AP) – Leaders of the Group of 20 Summit in Rome express broad support for major changes in the taxation of large global corporations.

The goal: to prevent multinational corporations from hiding profits in countries where they pay little or no taxes – commonly known as tax havens.

The proposal was finalized among 136 countries in October and sent to the G-20 for final consideration of the complex discussions led by the Organization for Economic Co-operation and Development. It would update the international tax rules of a century to keep up with the changes brought about by digitization and globalization.

The most important feature: a worldwide minimum tax of at least 15%, a key initiative of US President Joe Biden. “This is more than just a tax deal – it is diplomacy that is reshaping our global economy and bringing something to our people,” tweeted Biden from the summit on Saturday.

Treasury Secretary Janet Yellen says it will end a decade-long “race to the bottom” that saw corporate tax rates come down as tax havens sought to attract companies that used clever bookkeeping to take advantage of the low rates in countries where they were little had real activity.

Here is a look at the most important aspects of the tax treaty:

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WHAT WAS THE PROBLEM?

In today’s economy, multinational companies can make big profits from things like brands and intellectual property, which are easier to relocate than factories. Companies can assign the income they generate to a subsidiary in a country with very low tax rates.

Some countries compete for revenue by attracting bottom-rate businesses and attracting huge tax bases that generate high revenue even at tax rates only slightly above zero. Between 1985 and 2018, the global average corporate headline rate dropped from 49% to 24%. By 2016, over 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 would result in nearly $ 60 billion in additional US tax revenue.

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HOW WOULD A MINIMUM GLOBAL TAX WORK?

The basic idea is simple: countries would require a minimum rate of at least 15% for very large companies with annual sales in excess of € 750 million ($ 864 million).

If corporate profits were untaxed or lightly taxed in any of the world’s tax havens, their home country would impose a surcharge that would raise the rate to 15%.

This would make it pointless for a company to use tax havens, as the taxes avoided in the port would be collected domestically.

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HOW WOULD THE TAX PLAN FIT THE DIGITALIZED ECONOMY?

The plan would also allow countries to tax some of the revenues of the 100 or so largest multinational corporations if they do business in places where they have no physical presence, such as internet retailing or advertising. The tax would only apply to a portion of the profit that exceeds a profit margin of 10%.

In return, other countries would abolish their unilateral digital service taxes on US tech giants like Google, Facebook and Amazon. That would prevent trade disputes with Washington, which argues that such taxes are wrongly targeted at US companies.

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WHAT IS THE ROLE OF THE US IN THE AGREEMENT?

Biden has claimed that the US must join the global minimum tax in order to convince other nations to do so. This would mean raising the current foreign income rate of 10.5% to reflect the global minimum. His tax proposals are still being negotiated in Congress.

US participation in the minimum tax treaty is vital simply because so many multinational corporations are headquartered there – 28% of the 2,000 largest global corporations. A complete rejection of Biden’s global minimum proposal would seriously undermine the international agreement.

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EVERYONE LIKES THE DEAL?

Some developing countries and stakeholders like Oxfam and the UK-based Tax Justice Network say the 15% rate is too low. And while the global minimum would bring in about $ 150 billion in new government revenue, most of it would go to rich countries because that’s where many of the largest multinationals are headquartered. Developing countries participated in the talks and signed all but Nigeria, Kenya, Pakistan and Sri Lanka.

US critics, including Republican leaders and some business groups, say the proposed minimum tax would make America less competitive and potentially cost jobs, a sign that the key is to let other nations through so that the US is not disadvantaged.

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Any other reservations?

The EU Tax Observatory’s research consortium warns that exemptions for companies with real assets and employees in a given country could “exacerbate tax competition by encouraging firms to move real activities to tax havens”.

This means that some tax competition between countries would still be possible when it comes to actual business operations – as opposed to relocated bookkeeping.

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HOW WOULD THE AGREEMENT BE EFFECTIVE?

The support of the G-20 leaders concludes a negotiation process that has lasted for years. As soon as the approval is reflected in the final declaration of the summit, which is expected on Sunday, the implementation will then be transferred to the individual nations.

The corporate income tax, at which companies have no physical presence, would require countries to sign an intergovernmental agreement in 2022, which will be implemented in 2023. The global minimum could be applied by the individual countries according to model rules developed by the OECD. If the US and the European countries where most of the multinationals are headquartered were to waive such minimums, it would have much of the intended effect, even if some tax havens don’t.

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Associate press writer Joshua Boak in Washington contributed to this report.

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