As part of a worldwide effort to stop multinational firms from avoiding taxes by shifting profits to countries with low rates, 130 countries have agreed on a global minimum tax backed by US President Joe Biden.
It addresses challenges presented by a globalized, increasingly digital world economy in which profits can be relocated across borders and companies can earn profits online in places with no taxable headquarters.
Biden hopes to raise more revenue for his infrastructure and clean energy plans by pushing for a global minimum tax of at least 15%. There are still technical details to be worked out, and the agreement would not take effect until at least 2023.
The Paris-based Organisation for Economic Cooperation and Development has also agreed to tax a portion of the profits of the world’s largest companies in countries where they do business online but have no physical presence.
“The most important international tax accord in a century,” said French Finance Minister Bruno Le Maire.
The French-led countries have already begun imposing unilateral digital taxes aimed at US tech giants like Amazon, Google, and Facebook; under the agreement, they would withdraw those taxes, which the US considers unfair trade practices, in favor of the global approach.
In response to France’s tax on tech giants, former US President Donald Trump imposed retaliatory tariffs, and France welcomed the Biden administration’s efforts to reach a global accord.
“Online giants must pay their fair share of taxes where they operate,” he said. US Treasury Secretary Janet Yellen said it a “historic day.” “A small or medium business should not pay more taxes than an online giant because it is physically present in the country where it operates.”
“For decades, the United States has engaged in a self-defeating international tax competition, lowering our corporate tax rates only to watch other nations slash theirs in response,” she said in a statement. There was a global race to the bottom: Who could lower their corporate rate the fastest and the further?” Yellen told lower rates deprived countries of money for infrastructure, education, and efforts to combat the pandemic.
Despite the technical complexities, Manal Corwin, a tax principal at professional services firm KPMG and a former Treasury Department official, said the deal brought together “the big pieces” of a comprehensive agreement.
The proposal approved by the conference was “pretty much what the US proposal was,” noting that it was “critical” for the US to obtain a commitment from other countries to end their unilateral digital taxes.
The agreement allows countries to tax foreign earnings of their companies up to 15% if they are untaxed through subsidiaries in other countries. It would remove the incentive to use accounting and legal schemes to shift profits to low-tax nations where they do little or no business since the gains would be taxed at home anyway.
According to the OECD, such tax avoidance practices cost countries between $100 billion and $240 billion per year.
The 139 countries that took part in the talks did not all sign on to the deal. The finance ministry said it had “broad support” for the approach used in the agreement but could not agree to the 15% minimum. Paschal Donohoe, Ireland’s finance minister, said the country’s 12.5% rate is a “fair rate.” Ireland said from now on it would “constructively engage” in discussions.
Economic experts consider Bermuda and the Cayman Islands tax havens, as well as China and India, to be significant economic powers.
Next week, the G-20 finance ministers will meet in Venice, ahead of the final G-20 summit of country leaders in October.
Taxing companies with revenue but no physical presence would require countries to sign up for a multilateral convention, while each government could adopt the minimum corporate tax through national legislation.
Tax experts say that a voluntary approach could work if adopted by countries where many multinationals have their headquarters, such as the US and in Europe, by making clear to companies that even if they avoid tax by moving profits to overseas subsidiaries, those profits will be taxed at home up to the minimum.
As a means of discouraging companies from shifting profits to tax havens, Biden has proposed a 21% minimum tax rate on overseas earnings of US companies. First, Biden’s US tax must pass Congress, where the Democratic president has a narrow majority.