The use of global tax havens costs governments $500bn to $600bn in lost corporate tax revenue each year, according to the International Monetary Fund.
And in the new digital era, some governments have also argued that the Big Tech isn’t being properly taxed in countries where they have users.
Many countries, particularly in the developing world, say the current system of global tax rules and agreements concentrates corporate profits in richer countries, giving developing countries too small a slice of the pie.
But, for the first time, there’s now going to be a minimum corporate tax rate applied around the world, set at 15%, so companies have less incentive to move their operations to low-tax jurisdictions.
And the profits of about 100 of the biggest multinational corporations would be sliced differently for taxation purposes, so that more countries share in the tax revenue.
The Group of 20 nations, which represent about 90% of the global economy, finalised key details in October. So far, 136 countries have signed on, out of 140 countries involved in negotiations overseen by the Organisation for Economic Co-operation and Development.
Crucially, those now on board include Ireland and Hungary, which until now have benefited from having some of the lowest corporate tax rates in Europe.
How would it work?
Primarily, the rules will allow a country where a company is headquartered — call it Country A — to “top up” its taxation of the company if it’s paying less than 15% in Country B. For example, if the company is effectively paying a 12.5% tax in Country B, Country A can collect the extra 2.5%.
The tax reallocation work would affect multinationals that make more than €20bn a year in revenue and have a profit margin above 10%, exempting companies in financial services and extractive industries such as mining. This change will target about 100 of the world’s largest and most successful multinationals, including companies such as Amazon, Facebook and Google.
Critically, countries also agreed to immediately halt all new digital tax measures. Seeing an end to digital taxes has been a key aim throughout the negotiations for the US.
US Treasury Secretary Janet Yellen said the goal of the proposed global minimum rate is to end a “30-year race to the bottom on corporate tax rates.”
A big question is what the US will do, and ratification by the US Congress could be a do-or-die issue for the treaty.
Supporters of the global minimum corporate tax agreement believe that it will help stop the “race to the bottom” as countries compete against each other to cut taxes to attract businesses.
Not all are impressed, though.
Non-profit Oxfam International has criticised the deal, arguing that the minimum corporate tax rate of 15% is in fact too low.
Some critics also argue that the “minimum” may kill the various economic benefits that come with tax competition among countries.
As a matter of fact, countries for years have been debating significant changes to international tax rules that apply to multinational companies.
The latest agreement represents a major change for tax competition, and many countries will be rethinking their tax policies for multinationals in light of it.
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