The global tax deal: What you need to know

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The leaders of the G20 group of top economies have agreed to a long-awaited overhaul of the global tax system that will force some of the world’s largest corporations to give up around $ 150 billion in additional tax revenue every year.

Heads of state and government, including US President Joe Biden and French President Emmanuel Macron, approved proposals on the first day of their G20 summit in Rome, according to several officials briefed on the talks.

The planned revision emerged from politically tense negotiations led by the Organization for Economic Co-operation and Development (OECD).

During years of discussion, Washington threatened several European countries with a trade war after governments in Paris, Rome and London passed their own digital taxes specifically for Google and Facebook. The European Union was faced with an internal war as member countries like Ireland struggled to maintain their low corporate tax systems against others within the 27-country bloc. Developing countries warned that negotiations were not helping them recoup the tax revenues they needed.

Now that the G20 leaders have approved the deal, here is everything you need to know.

Why is?

The proposals are divided into two buckets. The so-called Pillar One enables governments to tax the 100 largest companies in the world above a certain threshold on their business in individual countries. To be accepted, companies must have a profit margin of at least 10 percent and annual sales of $ 20 billion or more. The aim is to redistribute these profits to countries where companies make their money, as opposed to the current system which allows companies to repatriate these funds to their home markets. In total, the new Pillar 1 system, which is expected to come into force by 2023, will distribute around 125 billion US dollars of existing tax revenue to more than 130 countries worldwide.

Under the second component, known as Pillar Two, countries will agree to a minimum global corporate tax of 15 percent so that multinational corporations cannot take advantage of tax havens and other low-tax countries to avoid their fair share. This part of the agreement provides for governments around the world to update their national tax rates – changes that could be completed by next year and generate an additional $ 150 billion in annual tax revenue worldwide. “

What problem is it trying to solve?

The COVID-19 pandemic has cast an uncomfortable spotlight on how the world’s largest corporations, many of them digital giants, continued to benefit despite the worst turnaround in the global economy. Even before the global health crisis, countries like France were calling for changes to the global tax system to force Silicon Valley’s biggest names – many of whom paid little or no taxes in the countries where their customers lived – to raise tax revenues. submit to governments worldwide.

The US didn’t see it that way. Under former US President Donald Trump, Washington resisted OECD proposals, claiming that any global corporate tax reform should only be voluntary. That attitude changed under the Biden government, which in the spring offered a solution that included taxing the world’s 100 largest countries, both digital and non-digital, as part of the tax changes. This plan reinvigorated the discussions and resulted in the deal expected this weekend.

Are everyone happy with the deal?

Yes and no. As with all global negotiations, officials have had to compromise along the way. Several EU countries that had passed their own domestic digital taxes have agreed to withdraw these taxes – as soon as the overall agreement comes into force in 2023 at the earliest. The US also had to allow some of the tax revenue generated by its tech giants to be shared with other countries, which did not go over well with some within the US Congress.

Activists, however, have criticized the agreement to exclude developing countries, many of which will generate only marginal additional tax revenue from the current agreement. Even members of big tech companies aren’t too happy to have their companies included, while other global giants from other industries like financial services and mining have been purposely excluded from the deal.

Is there an agreement on the line?

The G20 heads of state and government would like to see this, but there remain two major hurdles. One is the US Senate. According to the Chamber’s rules, it must approve part of the agreement – the part that focuses on dividing the revenue of companies around the world – with a two-thirds majority because it affects international treaties. Currently the Democrats have no votes. If US lawmakers don’t approve part of the global tax treaty, no one knows whether the pact will survive.

The other likely problem is the unilateral taxes on digital services in some (mostly European) countries. These levies will eventually be withdrawn under a separate agreement – but not until a definitive global agreement, including US involvement, is reached. Unless Washington can get both parts of the deal through Congress, all bets are whether European governments will keep their promises to waive their domestic taxes.

What’s next?

The negotiators have yet to finalize the details of the global compact, including the practical implementation of both parts of the agreement and the revision of domestic legislation to bring it into line with the OECD-backed agreement. For the global minimum corporate tax rate, this is likely to happen sometime in 2022. Global corporate income sharing agreement – most likely a new multilateral agreement – is expected to drag on over the next two years.

The world’s political leaders have invested political capital for years to get a deal, so a compromise is unlikely to go unapproved. Still, the U.S. and some European countries are playing a chicken game over who should blink first when it comes to getting the global tax treaty passed domestically or unilateral digital taxes backed out. Until an agreement is reached on this part of the broader agreement, it is still unclear whether the proposed global overhaul of tax rules will stand.

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