Global deal aims to deter multinationals’ use of tax havens

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More than 130 countries have reached an agreement on sweeping changes to the way large global companies are taxed.

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Goal: To prevent multinational companies from hiding profits in countries where they pay less or no longer taxes – known as tax havens.

A comprehensive agreement was reached between 136 countries on Friday after talks under the supervision of the Organization for Economic Cooperation and Development. It will update a century’s worth of international taxation rules to deal with the changes brought about by digitization and globalization.


Most important feature: a global minimum tax of at least 15%, a major initiative pushed by US President Joe Biden and Treasury Secretary Janet Yellen Yellen said the minimum tax would end decades of “race to the bottom” that led to corporate taxes. Have seen rates fall as tax havens sought to attract corporations that take advantage of lower rates — but do little real business in those locations.

A look at the key aspects of the deal:

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What problem does it solve?

In today’s economy, multinational companies are increasingly likely to make profits from intangible goods such as trademarks and intellectual property. They may be easier to relocate, and global companies may hand over their earnings to a subsidiary in a country where tax rates are much lower.

Some countries compete for revenue by using rock-bottom rates to lure companies, attracting large tax bases that generate large revenues, even when tax rates only apply above zero. Between 1985 and 2018, the global average corporate headline rate fell from 49% to 24%. As of 2016, half of all US corporate profits were booked in seven tax havens: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland. According to one estimate, this costs the US Treasury $100 billion annually.


How would a global minimum tax work?

The basic idea is simple: countries will legislate a global minimum corporate tax rate of at least 15% for very large companies with annual revenues exceeding 750 billion euros ($864 billion).

Then, if companies have earnings that are tax-exempt or lightly taxed in one of the world’s tax havens, their home country will impose a top-up tax that brings the rate down to 15%.

This would make it pointless for the company to use the tax haven, as the taxes deferred in the haven would be collected at home. For the same reason, this means that the minimum rate will still be in effect even if individual tax havens do not participate.


How will the tax plan address the digital economy?

The scheme allows countries to tax the share of earnings of 100 or more largest multinationals when they do business in places where they have no physical presence. This can be through Internet retailing or advertising. The tax would be applicable only on a portion of the profit above the profit margin of 10%.

In return, other countries would eliminate their unilateral digital services taxes on US tech giants such as Google, Facebook and Amazon. That would end a trade conflict with Washington, which argues that such taxes unfairly target US companies and threatens to retaliate with new tariffs.


Does everyone like deals?

Some developing countries and advocacy groups, such as Oxfam and the UK-based Tax Justice Network, say the 15% rate is too low and leaves too much potential tax revenue on the table. And although the global minimum will capture some $150 billion in new revenue for the government, the vast majority of it will go to wealthy countries because they are where many of the biggest multinationals are headquartered.

A minimum of 20% to 30% was recommended by the United Nations High-Level Panel on International Financial Accountability, Transparency and Integrity. In a report earlier this year, the panel said too low rates could encourage countries to lower their rates to remain competitive.

The countries that participated in the talks but did not sign the agreement were Kenya, Nigeria, Pakistan and Sri Lanka.


What is the US role in the agreement?

Biden’s tax agenda has been mired in talks among Democratic lawmakers, as the scope of his spending and proposed rate hikes are still under debate. But the administration has claimed it should expand the US global minimum tax to persuade other countries to do the same.

Biden has somewhat backed down from his initial proposals as Congress has provided his input. The latest plan from the House Ways and Means Committee would increase the global minimum tax from 10.5 percent to about 16.5 percent. The president initially wanted 21% for the US as the global minimum rate. Domestic corporate income will be taxed at 26.5% from 21% currently.

America’s participation in the minimum tax deal is important, simply because many multinationals are headquartered there. The outright rejection of Biden’s global minimum offer would seriously undermine international deals.

Manal Corwin, a tax principal at professional services firm KPMG and a former Treasury Department official in the Obama administration, said the removal of unilateral digital taxes, or DSTs, would give the US “a very strong motivation” to participate. That’s because the agreement would address a devastating trade dispute that could spread to unrelated companies in other sectors of the economy.

“When you get into the threats back and forth of tariffs, the tariffs don’t apply to companies that are in the crosshairs of the issue,” she said. “It could be DST today and then tomorrow it could be some more unilateral measures.” He said that international taxation needs stability and consensus “to encourage investment and growth ….

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