The agreement followed a proposal from US President Joe Biden for at least a 15 percent rate. [Representative image: Unsplash]
Some 130 countries have backed a global minimum tax as part of a worldwide effort to keep multinational firms from dodging taxes by shifting their profits to countries with low rates.
The agreement announced by the Organization for Economic Cooperation and Development on July 1 also provides for taxing the largest global companies in countries where they earn profits through online businesses but may have no physical presence.
Not all of the 139 countries that joined the talks signed on to the deal.
The agreement followed a proposal from US President Joe Biden for at least a 15 percent rate, an initiative that propelled the talks toward meeting a deadline for a deal by the middle of this year. The deal now will be discussed by the Group of 20 countries at meetings later this year in hopes of finishing the details in October and implementing the agreement in 2023.
Under the deal, countries could tax their companies' foreign earnings if they go untaxed through subsidiaries in other countries. That would remove the incentive to use accounting and legal schemes to shift profits to low-rate countries since the profits would be taxed at home anyway.
Here are some key questions:
WHAT IS A GLOBAL MINIMUM CORPORATE TAX?
Countries would change their tax laws so that if their companies’ profits go untaxed or lightly taxed offshore, the company would face an additional, top-up tax back home to bring its rate up to the minimum.
That would remove the incentive for companies to shift profits to low-tax countries, so the thinking goes, because if those companies escape taxes abroad, they would have to pay it at home anyway. And the minimum would weaken the motivation for countries to enact rock-bottom tax rates to attract companies in the first place.
At home, Biden has proposed raising the US tax rate on companies’ foreign earnings to 21 percent. This would mark an increase from legislation passed under his predecessor Donald Trump which had a range of 10.5 percent to 13.125 percent. Critics argued that the overseas rate passed under Trump, coupled with exemptions, was too low to deter corporations from profit-shifting. Even if the US rate winds up above the global rate, the difference could be small enough to eliminate most room for tax manipulation.
HOW BIG IS THE PROBLEM?
For decades, corporate earnings have been migrating to tax havens, often through complex avoidance schemes. From 1985 to 2018, the global average corporate tax rate fell from 49 percent to 24 percent. And by 2000-2018, US companies booked half of all foreign profits in just seven low-tax jurisdictions: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland. Though small countries levy a low rate, they may capture what is significant revenue for them.
And there’s some money at stake to be sure. US Treasury Secretary Janet Yellen has asserted that a global minimum would end a destructive “race to the bottom” in international taxation. According to the London-based Tax Justice Network advocacy group, governments lose $245 billion annually to tax havens. If that money were instead available to governments, they could use it for, among other things, managing their heavy costs for pandemic relief.
HOW DOES THIS AFFECT ORDINARY PEOPLE?
Several ways. Taxes on the earnings of multinational companies are ultimately paid by the shareholders in those companies — a group that is, in general, wealthier than average. As the tax load on corporate revenue has declined, the overall tax burden has tended to shift to wages and labor — in other words, from generally affluent shareholders to ordinary workers. Another reason to care: According to the OECD, large companies that operate across borders enjoy an unfair competitive advantage by capitalizing on international tax avoidance strategies that aren’t available to local-only companies.
HOW DO COMPANIES MOVE PROFITS TO FIND THE LOWEST TAX RATE?
Though some tax avoidance schemes are illicit, most are perfectly legal. Part of the issue is the nature of the modern economy: It is increasingly based on intangible assets, like trademarks, software and other intellectual property. Those are easier to move around than tangible assets, such as factories.
One way of shifting tax liability is through a profit-sharing agreement. This involves assigning a share of costs and profits to a subsidiary in a low-tax jurisdiction. Another way is to attach earnings from copyrighted software or other intellectual property to legal entities in tax havens.
THE DISPUTE OVER ‘DIGITAL’ TAXES
One part of the OECD talks had focused on taxing companies that do business in countries where, often because the companies’ businesses are Internet-based, they have no physical presence and thus pay little or no tax on those sales. France has passed a 3 percent “digital services tax” on revenue that is deemed to have been earned by big companies in France — a measure aimed at US tech giants like Google, Facebook and Amazon. Other countries have followed suit. Washington, though, has branded such unilateral taxes as improper trade practices that unfairly target US companies.[Inputs from Associated Press]