The Organization for Economic Cooperation and Development announced a major breakthrough in corporate tax rates on Friday after years of disagreement.
The group of developed nations has agreed on a worldwide minimum tax rate of 15 percent for companies. This represents a huge shift for smaller economies like the Republic of Ireland, which have largely attracted international companies due to a lower tax rate.
“The groundbreaking deal, agreed by 136 countries and jurisdictions representing more than 90 percent of global GDP, will also redistribute more than $ 125 billion in profits from around 100 of the world’s largest and most profitable MNEs to countries worldwide, to ensure that these companies pay a fair share of taxes wherever they operate and generate profits, ”the OECD said in a statement on Friday.
In a statement released Friday afternoon, President Joe Biden said the new rule would “finally level the playing field.”
“For decades, American workers and taxpayers have paid the price of a tax system that rewards multinational corporations for shipping jobs and profits abroad. This race to the bottom has not only harmed American workers, but has also put competitive pressure on many of our allies. “Also discriminate,” Biden said.
The breakthrough comes after some changes are made to the original text, most notably that the 15 percent rate will not be increased later and small businesses will not be affected by the new rates.
This helped Ireland – a longtime opponent of corporate tax rate hikes – to go along with the plan.
Hungary, another long-standing skeptic about a global tax treaty, also changed its mind after being assured there would be a long deadline for implementation.
Countries now need to work out some prominent details for the new deal to take effect in 2023.
The deal is “an achievement for economic diplomacy that can only be achieved once in a generation,” Treasury Secretary Janet Yellen said in a statement.
Yellen applauded the many nations that “have decided to end the race to the bottom in corporate taxation” and expressed the hope that Congress will use the reconciliation process to quickly put the deal into practice in the US
“International tax policy is a complex subject, but the obscure language of today’s agreement belies how simple and comprehensive it is to operate: when this agreement comes into effect, it will be much easier for Americans to find a job in the global economy. Earning a living, or scaling a business, ”Yellen’s statement reads.
The deal marks a shift in tax policy as it not only mandates a minimum tax rate for businesses, but also forces businesses to pay taxes where they operate – not just where they are headquartered.
The exact formula for calculating companies’ debts in the various jurisdictions is a detail that has yet to be finalized.
The announcement by international leaders was also made in part due to the coronavirus pandemic, which again required fairer taxation as governments seek new sources of funding.