Explainer: What is the global minimum tax deal and what will it mean?

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PARIS, Oct 8 (Businesshala) – A global deal to ensure that large companies pay a minimum tax rate of 15% and make it harder for them to avoid taxation, 136 countries agreed on Friday The Organization for Economic Co-operation and Development said on Friday.

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The OECD said four countries – Kenya, Nigeria, Pakistan and Sri Lanka – have not yet joined the agreement, but the countries behind the agreement account for more than 90% of the global economy.

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Here are the main points of the agreement:

Why Global Minimum Tax?

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With budgets strained following the COVID-19 crisis, many governments want more than ever to discourage multinationals from shifting profits – and tax revenues – to the low-tax countries where they are sold.

Increasingly, income from intangible sources such as drug patents, software and royalties on intellectual property has moved into these jurisdictions, allowing companies to avoid paying higher taxes in their traditional home countries.

The minimum tax and other provisions are intended to end decades of tax competition between governments to attract foreign investment.

How will a deal work?

The global minimum tax rate would apply to foreign profits of multinational companies with 750 million euros ($868 million) in sales globally.

Governments can still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their domestic governments can “top up” their taxes to a minimum of 15%. , thereby eliminating the benefit of transferring profits.

A second track of the overhaul would allow countries where revenue is earned to tax 25% of the so-called excess profits of the largest multinationals – defined as profits greater than 10% of revenue.

what happens next?

Following Friday’s agreement on technical details, the next step is for finance ministers from the Group of 20 economic powers to formally endorse the deal, paving the way for its adoption by G20 leaders in late October.

Nonetheless, questions remain about the US position that hangs over domestic tax reform, which the Biden administration wants to pursue through the US Congress.

The agreement calls on countries to bring it into law in 2022 so that it can take effect by 2023, an extremely strict deadline, as previous international tax deals took years to implement.

Countries that have created national digital service taxes in recent years must repeal them.

What will be the economic impact?

The OECD, which has stepped up negotiations, estimates the minimum tax will generate $150 billion in additional global tax revenue annually.

Tax rights on gains in excess of $125 billion will additionally be transferred to countries where they accrued from the low-tax countries where they are currently booked.

Economists expect the deal to encourage multinationals to repatriate capital to their country’s headquarters, giving a boost to those economies.

However, the various deductions and exceptions included in the deal are at the same time designed to limit the impact on low-tax countries such as Ireland, where many US groups base their European operations.

($1 = 0.8642 Euro)

Reporting by Leigh Thomas; Editing by Mark John and Edmund Blair

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