Frankfurt, Germany (AP) – More than 130 countries have agreed to sweeping changes to the way large global companies are taxed, including a 15% minimum corporate rate designed to prevent multinationals from withholding profits in low-tax countries.
The deal announced on Friday is an attempt to address the ways globalization and digitization have transformed the world economy. It would allow countries to tax some of the earnings of companies based elsewhere that make money through online retailing, web advertising and other activities.
US President Joe Biden has been one of the driving forces behind the agreement as governments around the world seek to boost revenue in the aftermath of the COVID-19 pandemic.
The agreement between 136 countries representing 90% of the global economy was announced by the Paris-based Organization for Cooperation and Economic Development, which hosted the talks that led to it. The OECD said the minimum tax for governments would be about $150 billion.
“Today’s agreement represents a once-in-a-generation achievement for economic diplomacy,” US Treasury Secretary Janet Yellen said in a statement. She said it would end a “race to the bottom” in which countries would overtake each other with lower tax rates.
“Instead of competing on our ability to offer low corporate rates,” she said, “America will now compete on the skills of our workers and our ability to innovate, which is a race we can win.”
There are several hurdles to face before the deal becomes effective. US approval of the related tax law proposed by Biden will be significant, especially since the US is home to many of the largest multinationals. A rejection by Congress would create uncertainty over the entire project.
Big US tech companies such as Google and Amazon have supported the OECD negotiations. One reason is that countries will agree to roll back personal digital services taxes levied on them in exchange for the right to tax a portion of their earnings under the global plan.
This means companies will deal with just one international tax regime, not a multitude of different ones depending on the country.
“This agreement opens the way for a true tax revolution for the 21st century,” said French Finance Minister Bruno Le Maire. “Eventually the digital giants will pay their share in taxes in the countries – including France – where they produce.”
On Thursday, Ireland announced it would join the agreement, except for a low tax policy that has prompted companies like Google and Facebook to base their European operations.
Although the Irish settlement was a step forward for the deal, developing countries have objected and Nigeria, Kenya, Pakistan and Sri Lanka have indicated they will not sign up.
Advocates of anti-poverty and tax fairness have said the bulk of the new revenue will go to wealthier countries and offer less to developing countries that rely more on corporate taxes. The G-24 group of developing countries said that without a substantial share of revenue from real gains, the deal would be “sub-optimal” and “not sustainable even in the short term.”
The deal will be signed by the Group of 20 finance ministers next week, and then taken up for final approval by G-20 leaders at a summit in Rome in late October.
Countries will sign a diplomatic agreement to impose taxes on companies that have no physical presence in a country but make profits there, such as through digital services. This provision will affect around 100 global firms.
The second part of the deal, a global minimum of at least 15%, will apply to companies with revenues in excess of 750 billion euros ($864 billion) and will be passed into domestic law by countries in accordance with model rules developed in the OECD. A top-up provision would mean paying at home to avoid tax abroad. As long as at least the major headquarter countries impose minimum taxes, most of the deal will have the desired effect.