Plans to force multinational companies to pay fairer tax by setting a global minimum have taken a step forward with the backing of 130 countries and jurisdictions, the Organisation for Economic Cooperation and Development announced on Thursday.
The US-backed deal sets a corporation tax rate of no less than 15 per cent in a bid to discourage companies from moving from one country to another to exploit lower rates.
G7 leaders gave their approval at the summit in Cornwall last month. Collectively, countries that have agreed to the plan represent more than 90 per cent of the world’s GDP.
“Today is an historic day for economic diplomacy,” treasury secretary Janet Yellen said in a statement.
“For decades, the United States has participated in a self-defeating international tax competition, lowering our corporate tax rates only to watch other nations lower theirs in response. The result was a global race to the bottom: Who could lower their corporate rate further and faster?”
She added that the agreement showed that “the race to the bottom is one step closer to coming to an end. In its place, America will enter a competition that we can win; one judged on the skill of our workers and the strength of our infrastructure”.
“We have a chance now to build a global and domestic tax system that lets American workers and businesses compete and win in the world economy. President Biden has spoken about a ‘foreign policy for the middle class,’ and today’s agreement is what that looks like in practice,” she added.
Ireland, Barbados, Hungary, and Estonia are among the OECD members who have not yet agreed to the deal.
The OECD said the new plan “updates key elements of the century-old international tax system” that is no longer fit for purpose in today’s global and digital economy.
The framework was decided over negotiations “for much of the last decade” and would ensure that global corporations “pay tax where they operate and earn profits”. The OECD said that this would add “much-needed certainty and stability to the international tax system”.
The first “pillar” of the plan will “ensure a fairer distribution of profits and taxing rights among countries” concerning large international companies, including digital ones.
This part of the plan is also meant to “reallocate some taxing rights” over multinational enterprises “from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there”.
The second pillar “seeks to put a floor on competition over corporate income tax, through the introduction of a global minimum corporate tax rate”.
The OECD said countries can use the minimum rate to “protect their tax bases”. The organisation said the new framework would help countries “repair their budgets and their balance sheets” as they try to recover from the Covid-19 pandemic.
Taxing rights on more than $100bn worth of profits will be reallocated to “market jurisdictions” every year. The minimum global corporate income tax rate of at least 15 per cent is estimated to generate around $150bn in additional global tax revenue each year.
“After years of intense work and negotiations, this historic package will ensure that large multinational companies pay their fair share of tax everywhere,” OECD secretary general Mathias Cormann said.
“This package does not eliminate tax competition, as it should not, but it does set multilaterally agreed limitations on it. It also accommodates the various interests across the negotiating table, including those of small economies and developing jurisdictions. It is in everyone’s interest that we reach a final agreement among all Inclusive Framework Members as scheduled later this year,” he added.
The “deadline for finalising the remaining technical work on the two-pillar approach” is set for October of this year and the new system’s implementation is scheduled for 2023.
Each country that has agreed to the new framework will have to implement their own policies in their home countries, which might become an issue in the US as some Republicans have indicated that they’re not happy with this new development.
The ranking member on the House Ways and Means Committee, Texas Republican Rep Kevin Brady, said in a statement: “In negotiations with the OECD, the Biden Administration has already given up significant US ground.”
He said the new framework would give a leg up to companies with headquarters outside of the US.
“This is a dangerous economic surrender that sends US jobs overseas, undermines our economy, and strips away our US tax base,” he added.
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