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Wednesday, October 27, 2021

Explained: What is the global minimum tax deal and what will it mean?

Economists expect that the deal will encourage multinationals to repatriate capital to their country of headquarters, giving a boost to those economies.

By: Reuters | Paris |
October 9, 2021 12:00:40 pm
Google's European headquarters in Dublin on July 5, 2021. The most sweeping overhaul of the international tax system in a century is poised to take a significant step forward this week, with nearly 140 countries, including Ireland, expected to settle on a 15 percent global minimum tax rate. (Paulo Nunes dos Santos/The New York Times)

A global deal to ensure big companies pay a minimum tax rate of 15% and make it harder for them to avoid taxation has been agreed by 136 countries, the Organisation for Economic Cooperation and Development said on Friday.

The OECD said four countries – Kenya, Nigeria, Pakistan and Sri Lanka – had not yet joined the agreement, but that the countries behind the accord together accounted for over 90% of the global economy.

Here are the main points of the accord:

Why a global minimum tax?

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

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

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

How would a deal work?

The global minimum tax rate would apply to overseas profits of multinational firms with 750 million euros ($868 million) in sales globally. Governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could “top up” their taxes to the 15% minimum, eliminating the advantage of shifting profits.

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

What happens next?

Following Friday’s agreement on the 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 an end October summit.

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

The agreement calls for countries to bring it into law in 2022 so that it can take effect by 2023, an extremely tight timeframe given that previous international tax deals took years to implement. Countries that have in recent years created national digital services taxes will have to repeal them.

What will be the economic impact?

The OECD, which has steered the negotiations, estimates the minimum tax will generate $150 billion in additional global tax revenues annually.

Taxing rights on more than $125 billion of profit will be additionally shifted to the countries were they are earned from the low tax countries where they are currently booked.

Economists expect that the deal will encourage multinationals to repatriate capital to their country of headquarters, giving a boost to those economies.

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

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