The Organisation for Economic Cooperation and Development (OECD) announced the leaders of the world’s 20 biggest economies – the G20 – have endorsed a new global tax deal that will change the face of international corporate taxation for firms like Google and Meta. The deal was signed off after a two-day G20 summit in Rome, despite tense negotiations, and is planned to take effect from 2023.
What’s the global tax deal all about?
The deal will see big companies forced to pay a minimum tax rate of 15 percent, and will make it harder for them to avoid taxation.
The plan will see major corporations handing over an extra $150billion (£110bn) in additional tax revenues each year.
There are two ‘pillars’ forming the structure of the deal.
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Pillar One allows governments to tax the world’s top 100 companies on their operations within individual countries.
The goal is to redistribute these profits to countries where firms actually make their money versus the current system, which allows companies to repatriate these funds to their home markets.
Pillar Two will see countries agree to a 15 percent global minimum corporate tax so that multinational firms can’t take advantage of tax havens and other low-tax jurisdictions to avoid paying their fair share.
This will see governments around the world updating their national tax rates, generating billions in annual global tax revenues.
How will the deal work?
The global minimum tax rate would apply to overseas profits of multinational firms with $868million (£635m) 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 percent minimum, eliminating the advantage of shifting profits.
A second track of the overhaul would allow countries where revenues are earned to tax 25 percent of the largest multinationals’ so-called excess profit – defined as profit in excess of 10 percent of revenue.
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Which countries fought against it?
The OECD said the deal had been agreed by 136 countries on Friday.
The leaders, including US President Joe Biden and French President Emmanuel Macron, endorsed proposals on the first day of the summit.
But the groundbreaking deal came out of politically fraught negotiations overseen by the OECD for many years.
Washington previously threatened several European countries with a trade war after governments in Paris, Rome and London passed their own digital taxes specifically aimed at the likes of Google and Facebook.
The European Union faced internal warfare as member countries like Ireland fought to hold onto their low corporate tax regimes from others within the 27-country bloc.
Developing countries warned that negotiations didn’t help them to recoup needed tax income.
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 more than 90 percent of the global economy.
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.
Negotiators must still finalise some details of the pact, including how the agreement will work in practice and the rewriting of domestic legislation to bring it in line with the OECD-backed deal.
For the global minimum corporate tax rate, that’s likely to happen sometime in 2022, but reaching an agreement on dividing up global corporate income is expected to drag out over the next two years.
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