Some 130 countries have agreed to a global minimum tax backed by US President Joe Biden as part of a global effort to prevent multinational companies from evading tax by shifting their profits to countries outside of low rates.
The deal announced Thursday is an attempt to address the challenges posed by a globalized and increasingly digital global economy in which profits can be relocated across borders and businesses can make profits online to places where they are. do not have a taxable head office.
The deal calls for a global minimum tax of at least 15%, a key piece pushed by Biden as he seeks to generate more revenue for his infrastructure and clean energy plans. There are still technical details to be worked out and it would take at least 2023 before the deal goes into effect.
The deal, announced by the Paris-based Organization for Economic Co-operation and Development, also calls for taxing a portion of the profits of the world’s largest companies in countries where they do business online but may have no presence. physical.
French Finance Minister Bruno Le Maire called it “the most important international tax deal in a century”.
Yellen back plan
Countries led by France have already started imposing unilateral digital taxes on US tech giants such as Amazon, Google and Facebook; as part of the deal, they would agree to withdraw these taxes, which the United States considers to be unfair trade practices, in favor of the comprehensive approach.
France’s tax on tech giants sparked tariff retaliation under former US President Donald Trump, and France hailed the Biden administration’s efforts to reach a global deal.
“The web giants have to pay their fair share of taxes where they do business,” he said. “There is no reason for a small or medium-sized business to pay more taxes than an online giant just because it has a physical presence in the country where it operates.”
US Treasury Secretary Janet Yellen called it a “historic day.”
“For decades, the United States has participated in self-defeating international tax competition, lowering our corporate tax rates only to see other countries lower theirs in response,” she said in a statement. “The result was a global race to the bottom: who could lower the rates of their companies more and more quickly? “
Yellen said lower rates were robbing countries of money for infrastructure, education and pandemic efforts.
Manal Corwin, tax director at professional services firm KPMG and a former head of the Treasury Department, said the deal pulls together “the big chunks” of a global deal, although the technical complexities remain to be resolved. She said what had been approved was “pretty much the US proposal,” noting that it was “extremely important” for the US to get a commitment from other countries to withdraw their unilateral digital taxes. .
Under the agreement, countries could tax the foreign profits of their companies by up to 15 percent if they are not taxed through subsidiaries in other countries. This would remove the incentive to use accounting and legal systems to shift profits to low-rate countries where they do little or no business, since the profits would be taxed at home anyway.
Not all of the 139 countries that joined the talks signed the accord. Ireland’s finance ministry said it had “broad support” for the approach used in the deal but could not agree to the 15 percent minimum. Finance Minister Paschal Donohoe said the country’s 12.5% rate was a “fair rate”.
Ireland has a notoriously generous intellectual property tax policy, which is a big part of why many tech companies, including Google and Apple, have large operations in the country. A few years ago, Google came under scrutiny for implementing what was called an ‘Irish double sandwich’ scheme in which billions of dollars in profits were transferred between two subsidiaries. in Ireland and one in the Netherlands, to save over $ 6 billion in taxes.
Cayman Islands pledge their support
Among the signatories were Bermuda and the Cayman Islands, considered by economists to be tax havens, and great powers such as China and India.
More discussions are expected at the G-20 finance ministers meeting in Venice next week, before final approval by the full G-20 summit of country leaders in October. The proposal to tax corporations where they have income but no physical presence would require countries to sign a multilateral convention, while the minimum corporate tax could be adopted by each country through national legislation on on a voluntary basis.
Tax experts say the voluntary approach could work if adopted by countries where many multinationals are headquartered, such as the United States and Europe, making it clear to companies that even if they avoid tax by transferring the profits to subsidiaries abroad, these profits will be taxed. at home to the minimum.
In the United States, Biden has proposed a minimum rate of 21% on overseas profits of large American companies to deter them from shifting their profits to tax havens. Biden’s U.S. tax must pass Congress first, where the Democratic president has only a slim majority.