Global agreement on minimum 15% tax for multinationals

admin November 5, 2021
Updated 2021/11/05 at 1:50 PM

136 nations have agreed to a worldwide agreement to guarantee that large corporations pay a minimum tax rate of 15% and make it more difficult for them to evade paying taxes, according to the Organization for Economic Cooperation and Development.

Four nations – Kenya, Nigeria, Pakistan, and Sri Lanka – have yet to sign the pact, according to the OECD, although the countries supporting it collectively account for more than 90% of global GDP.

What is the purpose of a global minimum tax?

With finances squeezed in the aftermath of the COVID-19 crisis, many governments are more determined than ever to prevent multinational corporations from moving earnings – and tax revenues – to low-tax jurisdictions regardless of where their sales are made.

Intangible revenue from medicine patents, software, and intellectual property royalties is increasingly migrating to these jurisdictions, enabling firms to avoid paying higher taxes in their conventional home nations.

The minimum tax and other requirements are intended to end decades of tax rivalry among governments in order to attract foreign investment.

What would an agreement entail?

Multinational corporations having worldwide revenues of 750 million euros ($868 million) would be subject to the global minimum tax rate. Governments could still establish whatever local corporation tax rate they wanted, but if firms pay lower rates in one nation than in another, their home governments may “top up” their taxes to the 15% minimum, negating the benefit of transferring earnings.

A second component of the revamp would enable nations where revenues are collected to tax 25% of the biggest multinationals’ so-called excess profit, defined as profit exceeding 10% of revenue.

So, what’s next?

Following Friday’s agreement on technical details, the pact will be officially endorsed by finance ministers from the Group of 20 economic powers, clearing the path for acceptance by G20 leaders at a conference in late October.

Nonetheless, there are unanswered issues regarding the US stance, which is dependent in part on a domestic tax overhaul that the Biden administration hopes to push through Congress.

The agreement requires nations to enact legislation by 2022 in order for it to take effect by 2023, a rather short period considering that past international tax agreements required years to execute. Countries that have enacted national digital services taxes in recent years will be required to repeal them.

What will the economic consequences be?

The OECD, which has been in charge of the discussions, predicts that the minimum tax would create $150 billion in new worldwide tax income per year.

More than $125 billion in earnings will be taxed in the nations where it is generated, rather than in the low-tax countries where it is presently recorded.

Economists predict that the agreement will encourage multinational corporations to repatriate wealth to their home countries, boosting their economies.

Various deductions and exclusions included into the agreement, on the other hand, are intended to mitigate the effect on low-tax jurisdictions like Ireland, where many US companies have European operations.

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