How the global contract emerges from the corporate use of tax havens

Frankfurt, Germany – More than 130 countries have signed an agreement on major changes in the taxation of major global companies.

Objective: To prevent multinational corporations from making a profit in small or low-tax countries, also known as tax havens.

The comprehensive agreement between the 136 countries was signed on Friday after talks overseen by the Organization for Economic Co-operation and Development. It will modernize the old international tax rules to keep pace with the changes caused by digitalization and globalization.

Its main feature: a minimum minimum tax of 15% worldwide, a key initiative of US President Joe Biden and Secretary of the Treasury Janet Yellen. Yellen said the minimum tax would end decades of “running from bottom to top” with lower corporate tax rates because tax havens have tried to lure companies using lower rates – but do small real business in those places.

Take a look at the key features of the deal:

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What problem are you treating?

In today’s economy, multinationals have the opportunity to make more profit from intangible assets such as brands and intellectual property. These can be easily changed and international companies can allocate the profits they make to a subsidiary in a country where tax rates are very low.

Some countries compete for revenue at very low rates to attract businesses, attracting large tax sites that generate significant revenue even when tax rates above zero are used only partially. Between 1985 and 2018, the number of global average business addresses dropped from 49% to 24%. In 2016, more than half of all U.S. corporate profits were made in seven tax havens: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland. This is estimated to cost the US Treasury $ 100 billion annually.

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How does the global minimum tax work?

The basic idea is simple: companies with annual sales of over 50 750 billion ($ 864 billion) will introduce a minimum global corporate tax rate of at least 15% for the largest companies.

Then, if companies have non-taxable profits or are subject to a slight tax in one of the world’s tax havens, their home country imposes an increased tax rate, which raises the rate to 15%.

This will make it impossible for the company to use the tax havens as the taxes evaded at the port will be collected at home. For the same reason, the minimum rate still applies even if there is no personal tax haven.

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How does the tax plan deal with the digital economy?

The plan would allow states to tax some of the profits of about 100 of the largest multinational corporations when they do business where they are not physically present. This can be done through online retail or advertising. Profits are taxable only above the 10% profit limit.

In return, other countries will repeal unilateral taxes on digital services levied on US technology companies such as Google, Facebook and Amazon. This avoids trade disputes with Washington, which threatens to unjustly target U.S. companies and retaliate with new tariffs.

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Does everyone like the deal?

Advocacy groups such as some developing countries and the tax justice network based in Oxfam and the UK have a very low rate of 15% and leave potential tax revenue on the table. While the global decision will bring about $ 150 billion in new revenue to governments, the vast majority will go to rich countries, where there are many large multinationals.

The United Nations High Level Panel on International Financial Accountability, Transparency and Integrity has recommended at least 20% -30%. In a statement released earlier this year, the commission said it would encourage countries to reduce their rates to remain competitive at the lowest rates.

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

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What is the role of the United States in the agreement?

Biden’s tax agenda is embroiled in negotiations among Democrats, while the size of his spending and the proposed rate hike are still under discussion. But the government backed its demand, saying the United States should extend the global minimum tax to other countries.

Biden deviated somewhat from his initial plans when Congress provided his input. The House Ways and Guidelines Group’s latest plan raises the global minimum tax rate from 10.5% to almost 16.5%. The president initially wanted the U.S. minimum global average of 21%. Domestic business income is currently taxed at 21% to 26.5%.

The involvement of the United States in the minimum tax agreement is very important because many multinational companies are there. The complete rejection of Biden’s global minimum plan would seriously undermine the international agreement.

Manal Carwin, director of taxation at professional services firm KPMG and a former Treasury official in the Obama administration, said the abolition of digital unilateral taxes, or DST, would provide a “very strong incentive” for the United States to participate. This is because the agreement will prevent a catastrophic trade dispute that could spread to companies unrelated to other sectors of the economy.

“If you make repeated threats about fees, companies that are at the crossroads of the problem should not be charged,” he said. “It may be summer today and there will be another unilateral move tomorrow.” He said international taxes need stability and alignment. To promote investment and growth …

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How will the agreement come into force?

The deal goes to the leaders of the group of twenty. There will be a deal as all 20 members sign the agreement on Friday. After that, implementation will go to each country individually.

The tax on non-physical profits for companies should be implemented by 2022 and should be implemented by 2022. If the United States and European countries, which are based on most multinational corporations, legally enforce such minimums, it would most likely have the intended effect.

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Joshua Poke, an Associated Press writer in Washington, DC, contributed to the report.