Global corporate tax deal moves ahead

Global corporate tax deal moves ahead

136 nations sign pact that outlines structure for minimum rates to end damaging ‘race to the bottom’

A vast overhaul of corporate taxation has won support from 136 countries, as nations resolved key differences over a global minimum rate and an end to new digital taxes that the United States has deemed discriminatory.

After years of missed deadlines and wrangling over how to handle global tech firms such as Facebook and Google, the deal reached on Friday included a 15% minimum rate for corporations. It also outlines the main parameters of how much profits of the 100 or so biggest multinationals would be taxed in more countries: 25% of profits over a 10% margin.

The deal moves a step closer to ending what US Treasury Secretary Janet Yellen calls a global “race to the bottom” among countries luring companies with ever-lower tax rates.

The Organisation for Economic Cooperation and Development (OECD), which has chaired the talks, said a minimum rate could ultimately raise government incomes by $150 billion a year, while new rules would reallocate $125 billion of profits to be taxed in countries where big corporations generate revenue but may have little physical presence.

Parties to the deal include all of the countries in the Group of 20, the European Union and the OECD, the Paris-based organisation announced on its website on Friday.

Also approving the deal were dozens of other countries, including Thailand, that are members of the OECD/G20 Inclusive Framework on BEPS (base erosion and profit shifting).

In addition, countries agreed not to impose new digital services taxes as of Friday, though the deal didn’t include specifics on when existing levies will be repealed.

The agreement marks a victory for global negotiations that almost ground to a halt during Donald Trump’s presidency and spiralled into trade tensions with unilateral measures and threats of retaliatory tariffs. A final deal would offer the promise of new revenues for governments facing huge debt burdens after the Covid-19 pandemic. 

“The alternative to this happening is that we see the growth of unilateral tax measures, we see the slow erosion of our global tax architecture,” said Irish Finance Minister Paschal Donohoe, whose government made a crucial last-minute concession to sign up to the deal. “All of those things would bring additional risks, additional instability.”

The latest accord builds on a preliminary deal reached in July, when governments agreed on key aspects of the plan for the first time — including which companies would be subject to the profit reallocation rules.

The years-long talks at the OECD are split into two so-called pillars. The first deals with questions of allocating profits for tax, while Pillar Two seeks to create a global minimum corporate tax rate.

Of the countries involved in the talks, Kenya, Nigeria, Pakistan, and Sri Lanka haven’t signed the deal, the OECD said.

The accord “is a raw deal for developing countries” who will get “next to nothing in extra direct revenue from this agreement”, Didier Jacobs, tax policy lead for poverty-fighting group Oxfam America, said in a statement.

The G20 looks to approve the plans at meetings of finance officials next week and a summit at the end of the month.

After that, the OECD must draw up draft legislation to implement minimum tax rules and a multilateral convention that would potentially affect a myriad of bilateral treaties.

The multilateral convention to implement Pillar One, the profit reallocation rules, will require countries to drop existing digital taxes and similar measures and not introduce future ones, and will define which unilateral measures are unacceptable under the agreement.

France, the first European country to introduce a levy hitting the revenues of US tech giants, has already pledged to make the abolition of its tax legally binding at the moment when the new OECD rules come into effect. 

“This agreement at the OECD is clearly a tax revolution which will lead to less unfairness, to more justice, to more efficiency in the way we will tax digital giants and the way we will put in place a minimum taxation,” French Finance Minister Bruno Le Maire said.

The OECD is aiming for a multilateral convention next year and implementation in 2023. That could prove ambitious in some countries, not least the US.

Republicans in Washington have warned they would not back a deal that surrenders revenues to foreign governments, and a leading senator, Patrick Toomey, has said the Senate is unlikely to ratify the agreement.

Senate Finance Committee Republicans on Friday warned the Biden administration against “circumventing the Senate’s constitutional treaty authority in implementing a global tax agreement.”

Switzerland said the OECD timeline does not respect its national legislative procedures and it will not introduce the new rules before 2023.

Tech companies offered a mixed reaction.

“We are encouraged by the governments’ commitment not to impose newly enacted unilateral tax measures on any company,” Jason Oxman, president of the Information Technology Industry Council, said in a statement.

“At the same time, we continue to call for the urgent withdrawal of all those unilateral tax measures currently in place.”

Countries also agreed on exceptions from the minimum tax — a contentious issue in the days leading up to the deal.

There will be a 5% carveout for income tied to tangible assets and payroll — matching what was agreed in July.

Friday’s deal also built in a 10-year transition period during which the carveout will decline, starting from 8% for tangible assets and 10% for payroll.