ROME – One of the lessons learned from the recent Group of 20 Summit in Rome was widespread support from leaders for sweeping change aimed at preventing large global corporations from hiding profits in tax haven countries where they have little or no Pay taxes.
The most important part of the proposal, which would update a century of international taxation rules to cope with the changes brought about by digitization and globalization: a global minimum tax of at least 15%. That was a key initiative by President Joe Biden.
“This is more than just a tax treaty – it’s diplomacy that is reshaping our global economy and bringing something to our people,” tweeted Biden from the summit.
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 unreal Had activities.
Here is a look at the most important aspects of the tax treaty:
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, 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.
HOW WOULD A MINIMUM GLOBAL TAX WORK?
Countries would set a minimum rate of at least 15% for very large companies with sales above $ 864 million a year.
If corporate profits were untaxed or lightly taxed in any of the world’s tax havens, their home country would impose an additional tax that would increase the rate to 15%.
That would make it pointless for a company to use tax havens because the taxes avoided in the port would be collected domestically.
HOW PLAN ADDRESSES 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 locations where they have no physical presence, such as internet retailing or advertising. The tax would only be levied on part of the profit from a profit margin of 10%.
In return, other countries would abolish their 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.
WHAT IS THE ROLE OF THE USA?
Biden said the United States would have to join the global minimum tax 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 because so many multinational corporations are headquartered there – 28% of the 2,000 largest global corporations. Rejection of Biden’s proposal would seriously undermine the international agreement.
EVERYONE LIKES THE DEAL?
Some developing countries and stakeholders like Oxfam and the UK-based Tax Justice Network believe the 15 percent rate is too low. And while the global minimum would bring in $ 150 billion in new revenue for governments, most of it would go to rich countries because that’s where many of the largest multinationals are based.
US critics, including Republican leaders and some corporate groups, say the proposed minimum tax would make America less competitive and potentially cost jobs
HOW WOULD THE AGREEMENT BE EFFECTIVE?
The support of the G-20 leaders concludes a negotiation process that has lasted for years.
After the G-20 has been approved, the implementation shifts to the individual nations. The corporate income tax, where 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 used by individual countries. If the United States and the European countries where most multinational corporations are headquartered were to have such minimum requirements, it would have much of the intended effect, even if some tax havens don’t.