Corporate Tax

EXPLAINER: How world deal curbs corporate use of tax havens

Updated 13 minutes ago

FRANKFURT, Germany (dpa) – More than 130 countries have reached an agreement on extensive changes in the taxation of large global companies.

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

The far-reaching agreement was reached on Friday by 136 countries after talks under the supervision of 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 minimum global tax of at least 15%, a key initiative by US President Joe Biden and Treasury Secretary Janet Yellen. Yellen said the minimum tax will end a decade-long “race to the bottom” that saw corporate tax rates fall as tax havens sought to attract companies that benefit from low rates – but barely do business in those locations.

Here’s a look at the key aspects of the deal:



In today’s economy, multinational companies are increasingly making profits from intangibles such as brands and intellectual property. These can be easy to move, and global corporations can allocate their income to a subsidiary in a country with very low tax rates.

Some countries compete for revenue by using lows to attract businesses, which attracts huge tax bases that generate high revenues even when tax rates are applied 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. According to an estimate, this costs the US Treasury Department $ 100 billion annually.



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

Then, when companies make untaxed or lightly taxed profits in one of the world’s tax havens, their home country would impose an additional tax 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. For the same reason, the minimum rate would also apply if individual tax havens did not participate.



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 locations where they have no physical presence. This can be through 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 and threatened with new tariffs.



Some developing countries and stakeholders like Oxfam and the UK Tax Justice Network say the 15% rate is too low and leaves way too much potential tax revenue on the table. 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.

A minimum of 20% to 30% has been recommended by the United Nations High Level Panel on International Financial Accountability, Transparency and Integrity. In a report earlier this year, the panel said that too low an interest rate can encourage countries to cut their interest rate in order to stay competitive.

Countries that participated in the talks but did not sign the agreement were Kenya, Nigeria, Pakistan and Sri Lanka.



Biden’s tax agenda is stuck in negotiations between democratic lawmakers as the size of his spending and proposed rate hikes are still under discussion. But the government has said it needs to increase the US global minimum tax to convince other nations to do so.

Biden withdrew somewhat from his original proposals when Congress made its contribution. The House Ways and Means Committee’s latest plan would increase the global minimum tax from 10.5% to around 16.5%. The president initially wanted 21% as the US minimum worldwide interest rate. Domestic corporate income would be taxed at 26.5%, up from the current 21%.

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

Manal Corwin, tax director at professional services firm KPMG and a former Treasury Department official in the Obama administration, said the elimination of unilateral digital taxes, or DSTs, would be “a very strong motivation” for the US to participate. Because the agreement would prevent destructive trade disputes that could spill over to independent companies in other economic sectors.

“If you threaten to and fro with tariffs, the tariffs are not necessarily imposed on the companies that are in the crosshairs of the topic under discussion,” she said. “It may be daylight saving time today and there may be other unilateral measures tomorrow.” She said international taxation needs stability and consensus “in order to encourage investment and growth …. (D) The dissolution of the global consensus when dealing with DSTs begins, can expand to other things “.



The agreement goes to the group of 20 executives. An agreement is likely as all 20 members signed the contract on Friday. The implementation then shifts to the individual countries.

The corporate income tax, at which companies have no physical presence, would require countries to sign an intergovernmental agreement in the course of 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 United States and the European countries where most of the multinationals are headquartered were to adopt such minimum requirements, it would have much of the intended effect.


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

This story was first published on October 8, 2021. It was updated on October 11, 2021 to correct the amount of revenue required to apply the tax to businesses. It should be 750 million euros ($ 864 million), not 750 billion euros ($ 864 billion).

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