Explain: How the global agreement gives rise to the corporate use of tax havens.
FRANKFURT, Germany – More than 130 countries have reached an agreement on sweeping changes to the taxation of major global companies.
A wide-ranging agreement was reached between the 136 countries on Friday after talks under the auspices of the Organization for Economic Co-operation and Development (OECD). It will update a century of international tax laws to address the changes brought about by digitization and globalization.
Most important feature: a global minimum tax of 15%, a significant step by US President Joe Biden and Treasury Secretary Janet Yellen. Yellen said the minimum tax would end a decades-long “race” that has seen a decline in corporate tax rates as tax havens are trying to attract corporations that have lower rates. Take advantage – but do very little real business in these places.
A look at the key aspects of the agreement:
What is the problem with this address?
In today’s economy, multinational corporations are increasing their chances of making a profit from extraordinary things, such as trademarks and intellectual property. They can be easy to transfer, and global companies can assign their earnings to a subsidiary in a country with very low tax rates.
Some countries compete for revenue by using rock bottom rates to attract companies, attracting large tax bases that generate huge revenue even when tax rates apply slightly above zero. Are. Between 1985 and 2018, the global average corporate headline rate dropped from 49% to 24%. As of 2016, more than half of all U.S. corporate profits were sold in seven tax havens: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland. It costs the US Treasury an estimated 100 billion a year.
How will a global minimum tax work?
The basic idea is simple: countries will legislate a global corporate tax rate of at least 15% for large companies with annual revenues of more than 750 billion euros (64 864 billion).
Then, if companies have earnings that are not taxed or lightly taxed in any of the world’s tax havens, their home country will impose a top-up tax that will bring the rate down to 15%.
This will make it pointless for a company to use tax havens, as the survivors of the havens will be taxed at home. Therefore, this means that the minimum rate will still be affected even if individual tax shelters do not participate.
How will the tax plan address the digitized economy?
The scheme will also give countries a share of the earnings of 100 or more multinational companies when they do business in places where they do not have a physical presence. This could be through internet retailing or advertising. The tax will apply to a portion of the profits in excess of the 10% profit margin.
In return, other countries will abolish their unilateral digital services tax on US tech companies such as Google, Facebook and Amazon. That would end trade disputes with Washington, which illegally targets US companies with such taxes and threatens retaliation with new tariffs.
Is everyone like a bargain?
Some developing countries and advocacy groups, such as Oxfam and the UK-based Tax Justice Network, say the 15% rate is too low and leaves too much potential tax revenue on the table. And while the world will generate at least 150 150 billion in new revenue for governments, much of it will go to rich countries because that’s where the big multinationals are headquartered.
The UN High Level Panel on International Financial Accountability, Transparency and Integrity recommended a minimum of 20-30%. In a report earlier this year, the panel said lower rates could encourage countries to lower their rates to stay competitive.
The countries that participated in the talks but did not sign the agreement were Kenya, Nigeria, Pakistan and Sri Lanka.
What is the US role in the agreement?
Biden’s tax agenda has been embroiled in controversy among democratic lawmakers, as the scope for raising their spending and proposed rates is still under discussion. But the administration has claimed that it will have to raise the US global minimum tax to persuade other nations to do the same.
Biden has retreated somewhat from his initial proposals because Congress has provided input. The House House and Men’s Committee’s latest plan would raise the global minimum tax from 10.5 percent to 16.5 percent. The president initially wanted 21% as the US minimum global rate. The country’s corporate income will be taxed at 26.5%, up from the current 21%.
At least the US participation in the tax agreement is important, simply because many multinational companies have headquarters. The complete rejection of Biden’s global minimum proposal would severely damage the international agreement.
Manal Coron, the tax principal for professional services firm PMG and a former Treasury Department official in the Obama administration, said the removal of the unilateral digital tax, or DST, would provide a “very strong impetus” for the United States to participate. This is because the agreement will end the catastrophic trade dispute that could spread to unrelated companies in other sectors of the economy.
“When you make threats behind tariffs, it is not necessary to impose tariffs on the companies that are debating the issue,” he said. Unilateral move He said international taxation needs stability and consensus “to encourage investment and growth ….
How will the agreement take effect?
The agreement will go to a group of 20 leaders. The agreement is possible as all 20 members signed the agreement on Friday. Enforcement then transfers to individual countries.
Taxes on earnings where companies do not have a physical presence In 2023, countries will need to sign an intergovernmental agreement. If the United States and European countries, where most of the multinational corporations are headquartered, at least legislate, it will have a huge impact.
Joshua Book, the Associated Press writer in Washington, contributed to this report.