How the global deal stems from corporate use of tax havens
Frankfurt, Germany – More than 130 countries have signed an agreement on sweeping changes to the taxation of major global companies.
The goal: to prevent multinational corporations from making profits in countries where they pay little or no taxes, also known as tax havens.
The comprehensive agreement was signed on Friday by 136 countries after talks overseen by the Organization for Economic Cooperation and Development. It will update outdated international tax rules to keep pace with the changes brought about by digitization and globalization.
Its main advantage: a minimum global tax of at least 15%, a major initiative of US President Joe Biden and Treasury Secretary Janet Yellen. Yellen said the minimum tax would end decades of a “race to the bottom” with lower corporate tax rates, as tax havens tried to entice businesses to take advantage of lower rates — but do little actual business in those locations.
Here’s a look at the key aspects of the deal:
What problem are you treating?
In today’s economy, multinational corporations are increasingly likely to profit from intangible assets such as brands and intellectual property. It is easily transferable, and international companies can allocate the profits they generate to a subsidiary in a country where tax rates are very low.
Some countries compete for very low revenue to attract businesses, and attract huge tax bases that generate significant revenue even when marginally above zero tax rates are applied. Between 1985 and 2018, the global average number of business addresses fell from 49% to 24%. In 2016, more than half of US corporate profits were earned in seven tax havens: Bermuda, Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland. It is estimated that this costs the US Treasury $100 billion annually.
How does the global minimum tax work?
The basic idea is simple: countries will offer a global minimum corporate tax rate of at least 15% for very large companies, and companies with annual sales of more than 750 billion euros ($864 billion).
If the companies then had untaxed profits or were lightly taxed in one of the world’s tax havens, their home country would impose an increased tax rate that would raise the rate to 15%.
This will make it unfeasible for the company to use tax havens, as taxes evaded at the port will be collected at home. For the same reason, this means that the minimum rate still applies even if individual tax havens are not included.
How does the tax plan address the digital economy?
The plan would also allow states to tax a portion of the profits of roughly the 100 largest multinationals when they do business in places where they are not physically located. This can be done through retail or online advertising. The tax is applied only to the portion of the profit that is greater than 10% of the profit margin.
In return, other countries will eliminate unilateral taxes on digital services imposed on US tech giants such as Google, Facebook and Amazon. This avoids trade disputes with Washington, which says such taxes have unfairly targeted US companies and threatened retaliation with new tariffs.
Does everyone like the deal?
Some developing countries and advocacy groups such as Oxfam and the UK-based Tax Justice Network say the 15% rate is too low and leaves a lot of potential tax revenue on the table. While the global outcome will generate about $150 billion in new revenue for governments, most of it will go to rich countries, where many of the largest multinational corporations are located.
The United Nations High Level Committee on International Financial Accountability, Transparency and Integrity has recommended a minimum of 20% to 30%. In a report released earlier this year, the commission said that the very low rate could motivate countries to lower their rate to stay competitive.
The countries that participated in the talks but did not sign the agreement are Kenya, Nigeria, Pakistan and Sri Lanka.
What is the role of the United States in the agreement?
Biden’s tax agenda is mired in negotiations among Democratic lawmakers, while the extent of his spending and proposed interest rate hike remains a matter of debate. But the government backed its claim by saying it would have to expand the US global minimum tax rate to get other countries to do so.
Biden withdrew somewhat from his initial proposals when Congress provided his input. The latest plan of the Ways and Means Committee will raise the minimum global tax rate from 10.5% to approximately 16.5%. Initially, the president wanted 21% as a minimum for the global average for the United States. Domestic business income is taxed at 26.5%, up from the current 21%.
US participation in the minimal tax deal is crucial just because there are so many multinational corporations there. A complete rejection of Biden’s global minimum proposal would seriously undermine the international deal.
Eliminating digital unilateral taxes, or DST, would provide a “very strong incentive” for the United States to participate, said Manal Corwin, director of taxation at professional services firm KPMG and a former Obama administration treasury official. This is because the agreement will prevent a devastating trade dispute that could spread to unrelated companies in other sectors of the economy.
“If you get involved in repeated threats about tariffs, the tariffs will not necessarily be imposed on companies that are in the crosshairs of the problem,” she said. “It may be summer time today and tomorrow there will be another unilateral action.” She said international taxation needs stability and harmonization “to encourage investment and growth…(v) The disintegration of the global consensus, if it begins with daylight saving time, can spread to other things.”
How will the agreement enter into force?
The deal goes to the leaders of the Group of Twenty. There will likely be an agreement as all 20 members signed the agreement on Friday. After that, implementation will go to each country separately.
The tax on profits in which companies have no physical presence requires countries to sign an intergovernmental agreement in 2022, with implementation in 2023. The global minimum can be applied by individual countries using the model rules established by the Organization for Economic Cooperation and Development. If the United States and the European countries where most multinational corporations are based legally enforce such minimums, they will largely have the intended effect.
Associated Press writer Joshua Bock in Washington contributed to this report.
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