More than 130 countries, including Australia, have agreed on radical changes in how large global companies are taxed.
The goal: to deter multinational companies from saving profits in countries where they pay little or no tax – better known as tax havens.
The comprehensive agreement was reached on Friday among 136 countries following talks under the auspices of the Organization for Economic Co-operation and Development (OECD).
It would update a century of the value of international tax rules to cope with the changes that digitalisation and globalization bring.
“Today’s agreement will make our international tax systems fairer and work better,” OECD Secretary-General Mathias Cormann said in a statement.
The most important feature is a global minimum tax of at least 15 percent, a key initiative pushed by US President Joe Biden and Finance Minister Janet Yellen.
Yellen said the minimum tax ends with a decade-long “race to the bottom” where corporate tax rates have been falling as tax havens have tried to attract companies that benefit from low rates — but who do not actually do much in these places.
Here is a look at important aspects of the trade.
What problem does it solve?
In today’s economy, multinational corporations are increasingly inclined to make money on intangible properties such as trademarks and intellectual property.
These can be easy to move and global companies can allocate the earnings they generate to a subsidiary in a country where tax rates are very low.
Some countries compete for revenue by using rock-bottom rates to entice companies and attract huge tax bases that generate large revenues, even when tax rates are applied only marginally above zero.
Between 1985 and 2018, the global average business headline rate fell from 49 percent to 24 percent.
In 2016, more than half of all U.S. corporate profits were booked in seven tax havens: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland.
It costs the US government $ 100 billion a year, according to estimates.
How would a global minimum tax work?
The basic idea is simple: countries would legislate a global minimum tax rate of at least 15 percent for very large companies, those with an annual revenue of over 750 billion euros ($ 1.2 trillion).
So if companies have earnings that go untaxed or easily taxed in one of the world’s tax havens, their home country would impose a top tax that would bring the rate to 15 percent.
It would make it pointless for a company to use tax havens as taxes avoided in the port would be levied at home. For the same reason, this means that the minimum rate will still come into force even if individual tax havens do not participate.
How would the tax plan handle the digitized economy?
The plan would also allow countries to tax part of the earnings of the around 100 largest multinationals when trading in places where they do not have a physical presence. It can be through online business or advertising. The tax would only apply to a portion of the profits over a profit margin of 10 percent.
In return, other countries would abolish their one-sided digital service charges on US tech giants like Google, Facebook and Amazon. It would stave off trade disputes with Washington, which claims such taxes are unfairly targeting U.S. companies and has threatened to retaliate with new tariffs.
Does everyone like the deal?
Some developing countries and advocates such as Oxfam and the UK Tax Justice Network say the 15 per cent rate is too low, leaving far too much potential tax revenue on the table. And while the global minimum would capture about $ 205 billion in new revenue for governments, most would go to rich countries because this is where many of the largest multinational corporations are headquartered.
A minimum of 20 to 30 percent was recommended by the UN High Level Panel on International Financial Responsibility, Transparency and Integrity.
In a report earlier this year, the panel said a rate that is too low could cause countries to lower their rate to stay competitive.
Countries that participated in the negotiations but did not sign the agreement were Kenya, Nigeria, Pakistan and Sri Lanka.
What does Australia think?
Treasurer Josh Freydenberg said Australia welcomed the “significant progress” being made towards the implementation of the tax treaty, “which will help ensure that multinational companies pay their fair share of taxes in Australia and abroad. “.
The federal government had considered introducing a digital tax, but then chose to wait for the OECD process.
“Australia has played a key role in driving these reforms, including by promoting the international tax reform agenda when we hosted the G20 in 2015 and as the current Vice-Chair of the OECD Inclusive Framework Steering Group on BEPS,” he said.
He added that he would discuss a possible start date in 2023 when finance ministers and central bank governors meet at the upcoming G20 summit on 13 October.
What is the US role in the agreement?
Sir. Biden’s tax agenda is stuck in negotiations between Democratic lawmakers, as the extent of his spending and proposed rate hikes are still under debate. But the administration has made a claim by saying it must extend the U.S. global minimum tax to convince other nations to do so.
Biden has withdrawn slightly from his initial proposals as Congress has provided its input. The latest plan from the House Ways and Means Committee would increase the global minimum tax to about 16.5 percent from 10.5 percent.
The president initially wanted 21 percent as the U.S. global minimum rate. The income of domestic companies would be taxed at 26.5 per cent, against 21 per cent at present.
The United States’ participation in the minimum agreement is crucial, simply because so many multinational companies are headquartered there. Complete rejection of Mr Biden’s global minimum proposal would seriously undermine the international agreement.
Manal Corwin, a tax official at the professional services firm KPMG and a former Treasury Department official in the Obama administration, said the removal of the unilateral digital taxes or DSTs would provide “a very strong motivation” for the United States to participate.
This is because the agreement will avert destructive trade disputes that could spread to unrelated companies in other sectors of the economy.
“It may be summer time today and then tomorrow it’s another one-sided measure.”
She said international taxation needs stability and consensus “to encourage investment and growth …. (T) he can clear the global consensus, if it starts with daylight saving time, can expand to other things.”
How would the agreement take effect?
The agreement will go to the group of 20 leaders. There is likely to be agreement as all 20 members signed Friday’s agreement. The implementation then moves to the individual countries.
The tax on earnings, where companies do not have a physical presence, would require countries to sign an intergovernmental agreement during 2022 with implementation in 2023.
The global minimum could be applied by individual countries using model rules developed by the OECD. If the United States and European countries, where most multinational companies are headquartered, legislate such minimum amounts, it would have much of the intended effect.
AP / ABC