ROME – One of the takeaways from the recent G20 summit in Rome is the broad support shown by world leaders for sweeping changes aimed at dissuading big global corporations from hiding their profits in tax havens where they pay little or no taxes.
The most important part of the proposal that would update a century of international tax rules to deal with the changes brought about by digitalization and globalisation: an overall minimum tax of at least 15%. It was a key initiative pushed by President Joe Biden.
“This is more than just a tax deal – it’s diplomacy that reshapes our global economy and benefits our people,” Biden tweeted from the summit.
Treasury Secretary Janet Yellen said it would end a decades-long ‘race to the bottom’ that has seen corporate tax rates fall as tax havens seek to attract companies that use accounting intelligent to take advantage of low rates in countries where they had little real activity.
Here is an overview of the main aspects of the tax agreement:
WHAT WAS THE PROBLEM?
In today’s economy, multinationals can reap big profits from things like trademarks and intellectual property that are easier to move than factories. Companies can allocate the income they generate to a subsidiary in a country where tax rates are very low.
Some countries compete for revenue by using floor rates to attract businesses, attracting huge tax bases that generate significant revenue even with tax rates barely above zero.
Between 1985 and 2018, the average global rate of corporate securities fell from 49% to 24%.
In 2016, more than half of all US corporate profits were accounted for in seven tax havens: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland.
White House officials say the global minimum would result in nearly $60 billion in additional US tax revenue.
HOW WOULD A GLOBAL MINIMUM TAX WORK?
Countries would legislate a minimum rate of at least 15% for very large companies with revenues over $864 million per year.
If corporate profits are untaxed or lightly taxed in one of the world’s tax havens, their home country will impose an additional tax that will raise the rate to 15%.
It would then be useless for a company to use tax havens because the taxes avoided in the haven would be collected at home.
HOW PLAN ADDRESSES THE DIGITAL ECONOMY
The plan would also allow countries to tax part of the income of the roughly 100 largest multinationals when they do business in places where they do not have a physical presence, such as through retail or advertising. on the Internet. The tax would only apply to a portion of profits above a profit margin of 10%.
In return, other countries would scrap their digital services taxes on US tech giants such as Google, Facebook and Amazon. This would avoid trade disputes with Washington, which says these taxes unfairly target American companies.
WHAT IS THE ROLE OF THE UNITED STATES?
Biden said the United States needed to join the global minimum tax to persuade other countries to do so. This would involve increasing the current foreign income rate by 10.5% to reflect the global minimum. His tax proposals are still being negotiated in Congress.
US participation in the minimum tax agreement is crucial because many multinationals are headquartered there – 28% of the world’s top 2,000 companies. Rejecting Biden’s proposal would seriously jeopardize the international agreement.
DOES EVERYBODY LIKE THE OFFER?
Some developing countries and advocacy groups such as Oxfam and Britain-based Tax Justice Network say the 15% rate is too low. And while the global minimum would capture $150 billion in new revenue for governments, most of it would go to rich countries, because that’s where many of the biggest multinationals are based.
US critics, including Republican leaders and some business groups, say the proposed minimum tax would make America less competitive and could cost jobs
HOW WILL THE AGREEMENT TAKE EFFECT?
The support from the G-20 leaders completes a years-long negotiation process.
After G-20 approval, implementation shifts to individual nations. Taxing profits where companies have no physical presence would require countries to sign an intergovernmental agreement in 2022, with implementation in 2023.
The global minimum could be applied by each country. If the United States and European countries where most multinationals are headquartered legislate such minimums, it would have much of the intended effect, even if some tax havens do not.