Explainer: What is the Global Minimum Tax Agreement and what will it mean?

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People walk through the financial and business district of La Defense in Puteaux near Paris, France, August 23, 2021. REUTERS/Sarah Meyssonnier

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PARIS, Oct 8 (Reuters) – A global agreement to ensure big businesses pay a minimum tax rate of 15% and make it harder for them to avoid tax has been reached by 136 countries, the report said on Friday. ‘Organisation for Economic Co-operation and Development.

The OECD said four countries – Kenya, Nigeria, Pakistan and Sri Lanka – had yet to join the deal, but the countries behind the deal together made up more than 90 % of the world economy.

Here are the main points of the agreement:

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WHY A GLOBAL MINIMUM TAX?

With budgets stretched after the COVID-19 crisis, many governments want more than ever to discourage multinationals from shifting their profits – and tax revenues – to low-tax countries, regardless of where their sales are made. .

Increasingly, income from intangible sources such as pharmaceutical patents, software and intellectual property royalties have migrated to these jurisdictions, allowing companies to avoid paying higher taxes in their home countries. traditional.

The minimum tax and other provisions aim to end decades of tax competition between governments to attract foreign investment.

HOW WOULD AN AGREEMENT WORK?

The global minimum tax rate would apply to the overseas profits of multinational companies with 750 million euros ($868 million) in sales worldwide.

Governments could still set the local corporate tax rate of their choice, but if companies pay lower rates in a particular country, their home governments could “raise” their taxes by a minimum of 15%, eliminating the tax rate. advantage of transferring profits.

A second track of the overhaul would allow countries where revenues are earned to tax 25% of the so-called excess profits of the largest multinationals – defined as profits above 10% of revenues.

WHAT HAPPENS NEXT?

After Friday’s agreement on technical details, the next step is for finance ministers from the Group of 20 economic powers to formally endorse the deal, paving the way for adoption by G20 leaders at a summit. end of October.

Nevertheless, questions remain about the US position which depends in part on a domestic tax reform that the Biden administration wants to push through the US Congress.

The agreement calls on countries to enact it in 2022 so that it can enter into force by 2023, an extremely tight deadline given that previous international tax agreements have taken years to be implemented.

Countries that have created national taxes on digital services in recent years will have to repeal them.

WHAT WILL BE THE ECONOMIC IMPACT?

The OECD, which led the negotiations, estimates that the minimum tax will generate $150 billion in additional global tax revenue each year.

Taxing rights on more than $125 billion of profits will additionally be transferred to the countries where they are earned in the low-tax countries where they are currently accounted for.

Economists expect the deal to encourage multinationals to repatriate capital to their home countries, giving those economies a boost.

However, various deductions and exceptions built into the agreement are at the same time designed to limit the impact on low-tax countries like Ireland, where many US groups base their European operations.

($1 = 0.8642 euros)

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Reporting by Leigh Thomas; Editing by Mark John and Edmund Blair

Our standards: The Thomson Reuters Trust Principles.

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