This weekend, the G20 leaders signed the most comprehensive overhaul of the global tax system in a generation, agreeing a minimum global tax rate of 15% and teeth to prevent multinational corporations from evading it. That’s how the whole deal will work.
Which countries and companies are affected by this deal?
Not only the G20 countries are involved in the agreement – there are a total of 136 countries worldwide. The new 15% tax would apply to foreign profits of multinational corporations with annual sales of at least € 750 million (about $ 868 million). It’s worth noting that, in theory, governments can still set whatever absurdly low corporate tax rate they want anyway. The deal only makes it so that the companies’ home countries can now force them to pay the difference. It’s about preventing large corporations like Apple or Bristol Myers Squibb from evading local taxes by moving to low-tax havens like Ireland or the Netherlands.
What else does the deal include besides a 15% tax?
To ensure that large companies pay this minimum rate, the nations have also agreed on a number of other regulations.
One of these allows countries where companies generate income to levy additional taxes (on top of the 15% rate) on the so-called “excess profits” that these companies generate. These companies could be asked to pay an additional 25% tax on any profits that exceed 10% of their sales.
Another part of the deal eliminates so-called unilateral taxes on digital services, which are designed to ensure that profits are taxed where economic value is created. This change would primarily affect the biggest players in tech.
What is the economic impact?
The Organization for Economic Co-operation and Development (OECD) estimates that the minimum tax will generate additional annual tax revenue of $ 150 billion.
The deal also postpones who can tax the companies. Taxing profits over $ 125 billion is becoming a job for the countries where they are made, not the tax havens where they are currently posted. This is to encourage global corporations to rethink the value of having an establishment in these countries and perhaps convince some of them to return capital to their home countries, which will boost the local economy.
The Biden administration claims the deal will make US companies more competitive globally, but it will also reduce incentives for them to move jobs overseas.
Okay what’s next?
Last weekend’s deal ironed out the technical details. Reaching that deal, negotiated by the G20 finance ministers since this summer, was in many ways the easiest part. Now comes the implementation. One place that could be a challenge is in America. Despite the key role the Biden administration played in negotiating the deal, it could be a struggle on Capitol Hill to get the US to abide by it. The changes can likely be enforced in Biden’s Build Back Better Act, but some of the specifics of the deal could also require the adjustment of various international tax treaties, and those changes would likely require the support of at least some Republicans, a group that has struggled almost every one the other tax changes of the administration.
The agreement sets a timetable for the minimum tax to come into force by 2023. Critics argue that this would be a very tight turnaround considering that previous global tax treaties have taken years longer to implement.