FRANKFURT, Germany – More than 130 countries have agreed on sweeping changes to the taxation of large global corporations, including a minimum tax rate of 15% to prevent multinational corporations from hiding profits in low-tax countries.
The deal announced on Friday is an attempt to address the way globalization and digitization have changed the world economy. It would allow countries to tax a portion of the revenues of companies based in other locations that make money through online retail, web advertising, and other activities.
United States President Joe Biden was a driving force behind the deal as governments around the world seek to boost revenues in the wake of the COVID-19 pandemic.
The agreement between 136 countries, which make up 90% of the world economy, was announced by the Paris-based Organization for Cooperation and Economic Development, which hosted the talks that led to it. The OECD said the minimum tax would bring governments around $ 150 billion.
“Today’s agreement is a unique achievement for economic diplomacy,” said US Treasury Secretary Janet Yellen in a statement. She said it would end a “race to the bottom” in which countries with lower tax rates outbid each other.
“Instead of competing on our ability to offer low corporate tariffs,” she said, “America will now compete on the skills of our people and our ability to innovate, a race we can win.”
The deal faces several hurdles before it can go into effect. US approval of Biden’s proposed tax legislation will be critical, especially given that the US is home to many of the largest multinational corporations. A rejection by Congress would unsettle the entire project.
The big US tech companies like Google and Amazon supported the OECD negotiations. One reason is that countries would agree to levy the taxes imposed on them on individual digital services in exchange for the right to tax part of their income under the global system.
In other words, companies would only deal with one international tax system, not a multitude of different ones depending on the country.
“This agreement paves the way for a real tax revolution for the 21st century,” said French Finance Minister Bruno Le Maire. “Finally, the digital giants will pay their fair share of taxes in the countries – including France – where they manufacture.”
On Thursday, Ireland announced that it would join the deal and abandon a low-tax policy that has led companies like Google and Facebook to locate their European operations there.
Although the Irish deal was a step forward for the deal, developing countries have objected and Nigeria, Kenya, Pakistan and Sri Lanka have announced that they will not sign.
Poverty reduction and tax justice advocates have said that most of the new revenue would go to wealthier countries and less to developing countries, which are more dependent on corporate taxes. The G-24 developing countries group said that without a greater proportion of the revenue from reallocated profits, the deal would be “sub-optimal” and “unsustainable even in the short term.”
The deal will be adopted next week by the group of 20 finance ministers and then by G-20 leaders for final approval at a summit in Rome in late October.
Countries would sign a diplomatic agreement to impose the tax on companies that have no physical presence in a country but make profits there, for example through digital services. This provision would affect around 100 global companies.
The second part of the agreement, the worldwide minimum of at least 15%, would apply to companies with sales of more than 750 million euros (864 million US dollars) and would be adopted into national law by the countries according to the model rules developed by the OECD. A top-up regulation would mean that taxes avoided abroad would have to be paid domestically. As long as at least the major headquarters countries implement the minimum tax, the deal would produce most of the desired impact.
Kirka answered from London. 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).