The global tax treaty will set a minimum rate of 15%
The world’s most powerful countries on Friday agreed to a radical overhaul of international tax rules, with officials backing a 15% global minimum tax and other changes aimed at cracking down on tax havens that have drained countries of revenue including they need it so much.
The Organization for Economic Co-operation and Development, who led the negotiations, said the new minimum tax rate would apply to companies with annual turnover above 750 million euros ($ 866 million) and generate around $ 150 billion additional global tax revenue per year.
“Today’s agreement will make our international tax arrangements fairer and more efficient,” Mathias Cormann, secretary general of the organization, said in a statement. “We must now work quickly and diligently to ensure the effective implementation of this major reform. “
The deal is the culmination of years of arduous negotiations that were relaunched this year after President Biden took office and the United States renewed its commitment to multilateralism. Finance ministers rushed to finalize the deal, which they hope will reverse a decades-long race to lower corporate tax rates that has encouraged companies to shift profits to low-tax jurisdictions , depriving countries of the money they need to build new infrastructure and tackle global health crises.
Hungary joined two other major holdouts, Ireland and Estonia, in agreeing to the plan on Friday. Kenya, Nigeria, Pakistan and Sri Lanka have not signed the agreement.
The United States, which proposed the 15% minimum corporate tax rate, has long sought ways to minimize incentives for companies to shift their profits overseas in order to lower their tax bill. As the Biden administration prepares to try to raise corporate rates in the United States, the implementation of a global minimum tax has become essential to prevent companies from simply moving their headquarters overseas.
Republicans, who opposed Mr. Biden’s national tax program, immediately opposed the global deal and threatened to block it in Congress, suggesting an imminent fight as the United States tries to ratify the deal .
The deal goes beyond fixing a headline rate – it also creates new rules for the digital age. Under the deal, tech giants like Amazon, Facebook and other large global companies will be required to pay taxes in countries where their goods or services are sold, even if they are not physically there. present.
The separate tax aimed at tech giants will reallocate more than $ 125 billion in profits from the home countries of the world’s 100 most profitable companies to the markets in which they operate.
The critical details remain to be worked out. The OECD statement did not offer a clear timeline for when existing “digital service taxes” countries have put in place will be canceled and how new taxes on large profitable companies will be distributed among countries. .
Politics could also complicate the administration’s objectives. To comply with the new global minimum tax requirements, Congress will need to pass a law raising the tax that US businesses pay on foreign profits to 15 percent, or more, from 10.5 percent.
Democrats expect they can pass an overall tax increase across party lines using a legislative process called budget reconciliation. Republicans disagree and on Friday several Republican senators warned that the administration’s negotiations appeared to “undermine the constitutional authority of the Senate, as well as the role of the United States as a reliable trading partner.”
The deal would represent a radical change in the way the world’s largest companies have been taxed for decades, and is likely to make them pay more taxes while spreading income more evenly among the countries where these companies sell. . Until now, profits have been heavily taxed where companies have a physical presence. European governments have been pushing for years to standardize a global tax system that low-tax countries like Ireland depended on to attract companies looking to reduce the taxes they pay.
“Since this morning, almost the entire world economy has decided to end the race to the bottom in corporate taxation,” Treasury Secretary Janet L. Yellen said in a statement.
French Finance Minister Bruno Le Maire called the deal “historic”, saying in an interview that “we must not underestimate the political and financial consequences”.
“For the first time, we would be in a situation globally to avoid tax optimization and tax evasion,” he said, “and to have a good amount of taxes paid by the giants of the digital from the United States, China or the European Union. countries.”
The deal is expected to be finalized next week in Washington by finance ministers from the Group of 20 largest economies, and national leaders are expected to sign when they meet for a summit in Rome in late October. Countries have set a goal of fully activating the agreement by 2023, as it will take time for countries to change their tax laws and for international tax treaties to be updated.
European governments are eagerly watching to see if Mr Biden can push through the legislation to ensure the United States complies.
If that happens, France, Britain and other governments have said they will remove taxes they levy on Silicon Valley companies, which almost sparked a transatlantic trade war. Countries debated when to remove these taxes, with European nations arguing that they should remain in place until the deal is fully promulgated to the world.
Mr Le Maire said France would lower its tax on Amazon, Google and other US digital giants most likely in 2023, after the new tax rules were put in place. France only collects 350 million euros a year from the tax, which is largely a symbolic move aimed at reaching a broader global deal for digital taxation.
Much of America’s business was wary of the Biden administration’s tax plans, but backed parts of the global deal because it would bring some clarity to their tax bills.
“Facebook has long called for reform of global tax rules, and we recognize that this could mean paying more taxes, and in different places,” said Nick Clegg, Facebook vice president for global affairs. “We are delighted to see an international consensus emerge. “
The spray talks gathered momentum in May when the United States agreed to a minimum tax of at least 15 percent, which was lower than the 21 percent it hoped for.
At international forums over the summer, negotiators debated potential exclusions, an implementation period and how the deal would be applied once enacted.
One of the biggest questions was how the European Union was going to coax recalcitrant countries such as Ireland, Estonia and Hungary, whose business models were built around low tax rates, to sign . Without unanimity within the European Union, the agreement could not be promulgated.
The devastating global economic impact of the coronavirus pandemic has been a push to strike a deal now, Le Maire said. Governments see the new tax revenues they can collect as a vital resource in reducing an inequality gap that has widened during the crisis.
“The level of inequality in the world was totally unacceptable, and the best way to reduce inequality in a very short period of time was to use the tax tool,” he said.
Hungary said it would sign the deal after Prime Minister Viktor Orban, who is at odds with the European Union on unrelated rule of law issues, called for better terms to ensure that the the country’s economy would not lose a competitive edge.
Hungary has long offered a 9% corporate tax rate to attract investment. He snatched an exemption that would allow multinationals to cut profits subject to minimum tax for a transition period of 10 years, instead of the five years originally proposed.
“We have succeeded in making a breakthrough on the comprehensive minimum tax agreement,” said Hungarian Finance Minister Mihaly Varga. “So Hungary could join the deal wholeheartedly. “
Ireland backed out after pledging that its small businesses, with annual turnover of less than € 750 million, would not face the new, higher tax. He also persuaded his counterparts to remove the words “at least” from an OECD draft declaration, ensuring that the minimum tax would not be increased a notch.
“I am convinced that Ireland’s interests are best served under the deal thanks to my contacts and negotiations with international stakeholders in Europe, the United States and beyond,” Paschal Donohoe said Thursday. , Irish Minister for Finance.
And Estonia on Thursday announced its support for the deal after resolving concerns that a minimum tax could hurt the country’s entrepreneurs.
Jim Tankersley contributed reports.