More Than 100 Countries Sign Pact to Tax Global Corporate Profits
A group of 136 nations – including every member of the G20 – reached an agreement on Friday to begin implementing a global minimum tax on corporate profits, a measure that they believe will reduce incentives to offshore money in tax havens and ensure that multinational entities pay their fair share.
The Organization for Economic Cooperation and Development, which led the negotiations, said in a statement that the proposal was “agreed by 136 countries and jurisdictions representing more than 90% of global GDP” and “will also reallocate more than USD 125 billion of profits from around 100 of the world’s largest and most profitable MNEs to countries worldwide, ensuring that these firms pay a fair share of tax wherever they operate and generate profits.”
Mathias Cormann, the secretary-general of the OECD, said in a statement that “today’s agreement will make our international tax arrangements fairer and work better. We must now work swiftly and diligently to ensure the effective implementation of this major reform.”
The plan is two-fold:
Under Pillar One, taxing rights on more than USD 125 billion of profit are expected to be reallocated to market jurisdictions each year. Developing country revenue gains are expected to be greater than those in more advanced economies, as a proportion of existing revenues.
Pillar Two introduces a global minimum corporate tax rate set at 15%. The new minimum tax rate will apply to companies with revenue above EUR 750 million and is estimated to generate around USD 150 billion in additional global tax revenues annually. Further benefits will also arise from the stabilization of the international tax system and the increased tax certainty for taxpayers and tax administrations.
OECD added that “the global minimum tax agreement does not seek to eliminate tax competition, but puts multilaterally agreed limitations on it, and will see countries collect around USD 150 billion in new revenues annually. Pillar One will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest and most profitable multinational enterprises. It will re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there. Specifically, multinational enterprises with global sales above EUR 20 billion and profitability above 10% – that can be considered as the winners of globalization – will be covered by the new rules, with 25% of profit above the 10% threshold to be reallocated to market jurisdictions.”
In other words, it is up to individual countries to adopt and enact the necessary legislation to levy this innovative tax. In the United States, Democrats in the Senate have the votes to accomplish this over objections from their Republican colleagues through the budget reconciliation process.
One of the most clever provisions contained within the agreement is its approach to taxing tech giants such as Google, Amazon, and Facebook, which often have no physical presence but enjoy a sizeable consumer market nonetheless.
Those types of digital businesses are “required to pay taxes in countries where their goods or services are sold, even if they have no physical presence there,” The New York Times noted. “The separate tax aimed at the technology giants will reallocate more than $125 billion of profits from the home countries of the 100 most profitable firms in the world to the markets where they operate.”