Global Minimum Tax proposal led by US in G7 meet gets backing from 130 nations

A global minimum tax, backed by US President Joe Biden, has been agreed upon by 130 countries as part of a global attempt to prevent multinational corporations from avoiding taxes by moving earnings to countries with low rates. The deal unveiled on Thursday, July 1, is an attempt to solve the issues posed by a globalised and increasingly digital world economy in which profits may be moved across borders and corporations can make online profits in locations where they do not have taxable headquarters.

Countries back deal on global minimum tax for companies

The agreement calls for a worldwide minimum tax of at least 15%, a major component pushed by Biden as he seeks additional revenue to fund his infrastructure and clean energy initiatives. There are still technical elements to work out, and the deal would not go into effect until at least 2023. The Paris-based Organization for Economic Cooperation and Development recently declared that portion of the income of the world's greatest corporations will be taxed in nations where they do business online but have no physical presence.

It was dubbed "the most important international tax accord in a century" by French Finance Minister Bruno Le Maire.  Countries led by France have already begun levying unilateral digital taxes on US tech giants like Amazon, Google, and Facebook; under the agreement, they would agree to abandon those charges, which the US regards as unfair trade practices, in favour of a global approach.

Under former US President Donald Trump, the French tax on internet firms prompted retaliatory tariffs, and France has praised the Biden administration's efforts to establish a worldwide agreement. "Online giants must pay their faire share of taxes where they have activities," he said. “There is no reason a small or medium business should pay more taxes than an online giant simply because it’s physically present in the country where it carries out its activities."

It was a "historic day," said US Treasury Secretary Janet Yellen. She noted, "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." Lower rates, according to Yellen, deprive countries of funds for infrastructure, education, and pandemic-fighting efforts. Although technical details remain to be worked out, Manal Corwin, a tax principal at professional services firm KPMG and a former Treasury Department official, said the pact put together "the big parts" of an overall agreement. She stated that what was accepted was "very much the US approach," and that it was "extremely crucial" for the US to get other countries to agree to stop imposing unilateral digital taxes.

Global minimum tax for companies

Nations could charge their companies' international earnings up to 15% if they go untaxed through subsidiaries in other countries under the agreement. Because profits would be taxed at home nonetheless, there would be no incentive to employ accounting and legal techniques to shift profits to low-tax countries where they conduct little or no business. According to the Organisation for Economic Co-operation and Development (OECD), tax avoidance activities cost countries between $100 billion and $240 billion in lost income each year.

The agreement was not signed by all 139 countries that participated in the talks. Ireland's finance minister claimed it had "wide support" for the agreement's strategy but couldn't agree on the 15% minimum. The country's 12.5 per cent tax, according to Finance Minister Paschal Donohoe, is a "reasonable rate." Ireland stated that it would “constructively engage” in future conversations.  Signatories included tax havens Bermuda and the Cayman Islands, as well as major economic powers China and India.

More discussion is likely at the G-20 finance ministers' meeting in Venice next week, ahead of the full G-20 summit of country leaders' approval in October. The plan to tax corporations with revenue but no physical presence would necessitate countries signing up for a multilateral agreement, while the minimal corporate tax may be accepted by each country on a voluntary basis through national legislation.

According to tax experts, a voluntary approach could work if adopted by countries where many multinational companies have their headquarters, such as the United States and Europe, by making it clear to companies that even if they avoid tax by moving profits to overseas subsidiaries, those profits will be taxed at home up to the bare minimum.  In the United States, Biden has recommended a minimum tax rate of 21% on large US corporations' overseas earnings to deter them from moving money to tax havens. Biden's US tax plan must first get through Congress, where the Democratic president only has a narrow majority.

(with inputs from AP)

Picture Credit: AP