Nearly 140 countries agreed Friday to the most sweeping overhaul of global tax rules in a century, a move that aims to curtail tax avoidance by multinational corporations and raise additional tax revenue of as much as $150 billion annually.
But, the agreement, which has been a decade in making, now must he implemented by the signatories ,. This is an unlikely path, especially in a divided U.S. Congress.
The reform sets out a global minimum corporate tax of 15%, targeted at preventing companies from exploiting low-tax jurisdictions.
The global minimum tax’s floor was considered a win for America and the country’s ability to collect money from businesses. She asked Congress to act quickly to pass the international tax proposal it was debating. This would allow for the expansion of the child tax credit, climate change initiatives and other policy changes.
“International taxes policy is a complicated issue. However, the simple language in today’s agreement shows how broad and straightforward the stakes were. “When this deal is enacted,” Ms. Yellen stated.
The agreement among 136 countries also seeks to address the challenges posed by companies, particularly technology giants, that register the intellectual property that drives their profits anywhere in the world. As a result, many of those countries established operations in low-tax countries such as Ireland to reduce their tax bills.
The final agreement was supported by Ireland, Estonia, and Hungary. These three European Union members withheld support for the preliminary agreement that had been reached in July. The deal was rejected by Nigeria, Sri Lanka, Pakistan, and Kenya.
*) The new agreement would split existing tax revenues so that customers’ countries are more favorably affected. To reduce tax avoidance, the largest countries must be implemented, along with the lowest-tax jurisdictions.
Overall, the OECD estimates the new rules could give governments around the world additional revenue of $150 billion annually.
The final deal is expected to receive the backing of leaders from the Group of 20 leading economies when they meet in Rome at the end of this month. To put this overhaul in practice, signatories must amend their national laws as well as international treaties.
The signatories set 2023 as a target for implementation, which tax experts said was an ambitious goal. Even though the agreement will likely be able to withstand the inability of small economies to pass new laws it could become severely weakened by large economies such as those found in the U.S.
” We all depend on the larger countries being able move at approximately the same speed together,” stated the Irish Finance Minister.
It would be a matter of concern for other countries if any large economy didn’t find themselves in the position to apply the agreement. It might take a little .”
for this to become obvious.
The work of Congress on this deal is divided into two phases. The first, this year, will be to change the minimum tax on U.S. companies’ foreign income that the U.S. approved in 2017. To comply with the agreement, Democrats intend to raise the rate–the House plan calls for 16.6%–and implement it on a country-by-country basis. This can be done by Democrats on their own, but they’re trying to make it part of President Biden’s larger policy agenda.
*The timing and complexity of the second phase are less certain. This is the point where the U.S. must agree to an international agreement changing the taxation of income. Analysts believe that this would be necessary to create a treaty. This would require the Senate’s two-thirds approval and support by Republicans. Ms. Yellen is more careful about the details and the timeline of the second phase.
A trade war has been threatened by friction between the U.S. and European nations over taxation of tech companies.
European officials argue that U.S. technology giants should be paying more in tax Europe. They also advocated for taxing rights to digital products where they are produced.
The U.S. however, refused to comply. Several European countries introduced digital taxes. The U.S. threatened to respond by imposing new tariffs on European imports.
The compromise consisted of reallocating taxing rights to all large companies above a profit threshold.
According to the Friday agreement, all governments agreed not to add any levies. They also pledged that they would eventually remove any existing levies. However, the U.S. has not yet agreed to a timetable. This is pending bilateral talks between those who have instituted the levies and the U.S.
Technology companies support international agreements. They see them as an opportunity to prevent a complex network of levies across countries that could tax profits multiple times.
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The Organization for Economic Cooperation and Development, which has been guiding the tax talks, estimates that some $125 billion in existing tax revenues would be divided among countries in a new way.
Those new rules would be applied to companies with global turnover of EUR20 billion (about $23 billion) or more, and with a profit margin of 10% or more. That group is likely to include around 100 companies. Governments have agreed to reallocate the taxing rights to a quarter of the profits of each of those companies above 10%.
Friday’s agreement stipulates that the revenue and profitability thresholds to reallocate taxing rights may also be applied to smaller companies if such a segment is included in financial statements. This provision could be applied to
Amazon Web Services is Amazon’s cloud division. However, Amazon overall may not be profitable enough to qualify due to its low-margin E-commerce business.
The other part of the agreement sets a minimum tax rate of 15% on the profits made by large companies. Smaller companies, with revenues of less than $750 million, are exempted because they don’t typically have international operations and can’t therefore take advantage of the loopholes that big multinational companies have benefited from.
*)Low tax countries like Ireland will experience a decline in their revenues. The final agreement is not well received by developing countries. They pushed for a higher minimum rate of tax and the reallocation of more profits to the biggest companies.
–Sam Schechner, Paris, contributed to this article.
Corrections & Amplifications
The global tax agreement was rejected by Nigeria, Sri Lanka, Sri Lanka, and Pakistan. In an earlier version, this article stated incorrectly that St. Vincent had rejected the agreement. This article was corrected on October. 8. )
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