Corporate Taxes Poised to Rise After 136-Country Deal

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The agreement seeks to set a global minimum tax, but officials face challenges in implementing the agreement.

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The reform sets a global minimum corporate tax of 15%, which aims to prevent companies from exploiting lower-tax jurisdictions.

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Treasury Secretary Janet Yellen said the destination set by the global minimum tax was a victory for the US and its ability to raise money from companies. He urged Congress to move swiftly to implement international tax proposals that would help pay for expanded child tax credits and expanded climate change initiatives, among other policies.

“Making international tax policy is a complex issue, but the mysterious language of today’s agreement recognizes how simple and broad the stakes are: When the deal goes into effect, the US will make the global economy a much easier place to find jobs, earn a living.” , or the scale of a business,” said Ms Yellen.

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The agreement between 136 countries seeks to address the challenges posed by companies, especially technology giants, who register intellectual property that drives their profits anywhere in the world. As a result, many of those countries set up operations in low-tax countries, such as Ireland, to reduce their tax bills.

The final deal was supported by Ireland, Estonia and Hungary, three EU members who halted their support for the initial deal in July. But Nigeria, Kenya, Sri Lanka and Pakistan continued to reject the deal.

The new agreement, if implemented, would split existing tax revenues in a way that favors the countries where customers are based. The largest countries, as well as low-tax jurisdictions, must implement the agreement to significantly reduce tax avoidance.

Overall, the OECD estimates that the new rules could give governments around the world an additional $150 billion in revenue annually.

The leaders of the Group of 20 major economies are expected to meet in Rome later this month. Thereafter, signatories would have to change their national laws and amend international treaties to put the overhaul into practice.

The signatories set 2023 as the implementation target, which tax experts described as an ambitious target. And while the agreement would survive the failure of a smaller economy to pass new laws, it would be greatly weakened if a larger economy—such as the US—fails.

“We are counting on all the big countries to be able to move at almost the same pace together,” said Irish Finance Minister Pascal Donohoe. “If a major economy does not find itself in a position to implement the agreement, it may matter to other countries. But that may not be clear for some time.”

Congress’s work on the deal will be divided into two phases. First, this year, the minimum tax on foreign income of American companies will have to be changed, which the US approved in 2017. To comply with the agreement, Democrats intend to raise the rate—the House plan demands 16.6%—and implement it. on a country-by-country basis. Democrats can pursue this on their own and they are trying to do so as part of President Biden’s broader policy agenda.

The second stage will be difficult, and the timing is less certain. That’s where the US would have to agree to change the rules for an international agreement where income is taxed. Many analysts say this would require a treaty, which would require a two-thirds vote in the Senate and thus some support from Republicans. Ms Yellen has been more circumspect about the Phase II program and procedural details.

Tensions between European countries and the US over taxation on American tech giants have threatened to start a trade war.

In a long-running conversation about new international tax rules, European officials have argued that US tech giants should pay more taxes in Europe, and have fought for a system that would reduce some of those countries’ digital taxes. Will reallocate tax rights on products where the product is produced. is consumed.

However, the US opposed it. Many European governments introduced their own taxes on digital services. The US then threatened to respond with new tariffs on imports from Europe.

The agreement was to reallocate tax rights on all large companies that are above a certain profit threshold.

Under Friday’s agreement, governments promised not to impose any new levies and said they would eventually withdraw any. But the timetable for doing so has not yet been decided through bilateral discussions between the US and the countries that have introduced the new levy.

Even though they will have to pay more taxes after the overhaul, technology companies have long-backed efforts to secure an international settlement, which they see as a way to avoid a chaotic network of national levies that have Threatened to tax the same profit multiple times.

The Organization for Economic Co-operation and Development, which is guiding the tax talks, estimates that some $125 billion in existing tax revenue will be split between countries in a new way.

Those new rules will apply to companies with a global turnover of €20 billion (about $23 billion) or more, and with a profit margin of 10% or more. About 100 companies are likely to be included in that group. Governments have agreed to reallocate tax rights to a quarter of the profits above 10% of each of those companies.

The agreement, announced Friday, specified that its revenue and profitability thresholds for reallocating tax rights may also apply to a portion of a larger company if that clause is reported in its financial accounts. Such provision shall apply to Amazon.com Inc. NS

Even though Amazon Web Services, the cloud division, isn’t profitable enough to qualify because of its low-margin e-commerce business.

The second part of the agreement stipulates a minimum tax rate of 15% on profits made by large companies. Small companies with revenues of less than $750 million are exempt because they usually do not have international operations and therefore cannot take advantage of loopholes that have benefited larger multinationals.

Low tax countries like Ireland will see an overall decline in revenue. Developing countries are the least happy with the final deal, with both pushing for a higher minimum tax rate and the redistribution of large portions of the biggest companies’ profits.

improvement and amplification

Nigeria, Kenya, Sri Lanka and Pakistan continued to reject the global tax deal. An earlier version of this article incorrectly stated that St. Vincent rejected the deal. (Corrected October 8.)

Paul Hannon at [email protected] and Richard Rubin at [email protected]

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