Press Play to listen to this article
The world’s largest companies like Facebook and Johnson & Johnson will face an additional collective tax burden of hundreds of billions of dollars on Friday after 136 countries signed a detailed plan Revise international corporate tax rules.
The US, UK, China, India and all EU countries have signed the international agreement negotiated under the leadership of the Organization for Economic Co-operation and Development. Kenya, Nigeria, Pakistan and Sri Lanka were the handful of the 140 nations involved in the negotiations that decided not to sign.
The deal aims to ensure that the world’s top 100 companies pay taxes on their operations and sales around the world, while introducing a minimum international effective corporate tax rate of 15 percent. The global tax rate would allow countries collectively to collect an additional $ 150 billion in annual tax revenue, while the levy would share a separate $ 125 billion in corporate tax revenue among participating governments worldwide.
The global deal, which will have to be approved by G20 leaders this month and expected to take at least two years to implement, represents the first major overhaul of the corporate tax system in decades. It comes amid ongoing US tensions and Europe on how these proposals will apply to companies operating in their jurisdictions. Officials around the world are looking for new sources of income to fund economic recovery related to the COVID-19 crisis.
“This will make our international tax system work better and fairer,” said OECD Secretary General Mathias Cormann. tweeted after signing the contract. “It is a great victory for an effective and balanced multilateralism. It is a far-reaching agreement that ensures that our international tax system fulfills its purpose in a digitized and globalized world economy.”
The two so-called pillars of the deal are intended to make it considerably more difficult for digital giants and multinational companies to shift their profits around the globe and avoid the tax authorities of the countries through clever – and legal – bookkeeping.
The minimum tax rate, the so-called Pillar Two, is also intended to discourage companies from parking their profits in tax havens – a permanent problem that was recently made public in the Pandora Papers. The so-called Pillar One will distribute corporate tax profits above a certain threshold to countries in which they sell goods and services.
Years of negotiations have flowed into the international agreement after national efforts, mainly in the EU, to tax US tech companies like Amazon and Facebook. These domestic taxes would have threatened a global trade war – especially between the EU and the US. The agreement aims to end these tensions and make it difficult for companies to divert their profits to the countries’ existing tax systems.
Critics claim that the overhaul will benefit Western countries disproportionately, while it may hamper the ability of governments to set their own tax rates to attract international investment to their shores.
“The expected deal would result in rich OECD countries taking most of the new revenue and also severely restricting the freedom of others to set their tax rules and defend their tax bases,” said Alex Cobham, CEO of the Tax Justice Network. “Perhaps it has always been naive to expect a rich country club to deal with tax abuse when the members of the club and their dependencies are the main perpetrators of that abuse.”
The finance ministers of the G20 countries are expected to approve the agreement at their meeting in Washington next week. The heads of state and government of these countries are expected to approve the agreement by the end of the month, thus starting the difficult task of implementing the rules by the end of 2023.
Many of the signatories had already committed to the revision in July when the OECD first unveiled the main features of the agreement. But there were some objectors, particularly Ireland, who opposed the advice in the July statement to set a minimum tax rate of “at least” 15 percent. Those two words have since disappeared.
The deal announced on Friday is more detailed than its predecessor and adjusted to allow countries, particularly in the EU, to come on board. The new fine print was vital to Ireland’s win after Dublin shrank at the prospect of abandoning its decade-old corporate tax rate of 12.5 percent. That will not be the case, because the international tariff of the OECD is only aimed at companies with an annual turnover of at least 750 million euros. This allows the Irish to keep their existing tax system while imposing a so-called 2.5 percentage point surcharge on the largest international companies based on the Emerald Isle.
Changes to a global minimum corporate tax rate are likely to be approved by countries around the world sometime next year.
According to a complex formula for the first pillar – which divides 25 percent of the profits of companies with a profit margin of at least 10 percent and annual sales of at least $ 20 billion worldwide – governments can get additional tax revenue from the largest companies in the world, ever according to how large their business activities are in each jurisdiction. These changes are expected to come into effect by 2023.
Friday’s deal also includes tax deductions on certain corporate assets and a commitment to deduct national taxes on tech giants in the years to come. However, the European Commission is free to propose a separate EU digital levy as long as it applies to many companies at a very low rate. Washington had successfully lobbied Brussels to postpone these plans until a final OECD agreement could be reached.
As part of the final agreement, companies will benefit from tax breaks under the minimum corporate tax rate proposals, which will allow those companies to deduct some of the value they have on property, plant and equipment and payroll in countries in which they operate. These deductions decrease from 8 or 10 percent to 5 percent over 10 years.
Do you want more analysis of POLITICS? POLITICS Pro is our premium intelligence service for professionals. From financial services to commerce, technology, cybersecurity, and more, Pro offers the real-time intelligence, deep insights, and breakthrough insight you need to stay one step ahead. E-mail [email protected] to request a free trial.