Leaders of the world’s biggest economies who have gathered in Rome formally endorsed an ambitious plan on Saturday to overhaul the way countries around the world tax multinational companies. Image Credit: Pixabay

Rome: Leaders of the world’s biggest economies who have gathered in Rome formally endorsed an ambitious plan on Saturday to overhaul the way countries around the world tax multinational companies.

The government heads backed the agreement during their first formal session of talks at a Group of 20 summit, according to a summary of the session obtained by Bloomberg News and two US officials who spoke on condition of anonymity because the information wasn’t public yet.

On Friday, a senior US administration official, travelling with President Joe Biden, called the plan a historic reshaping of the rules for the global economy that will force corporations to pay their fair share of taxes. That echoed previous comments by Treasury Secretary Janet Yellen, whose support helped push forward a deal that had languished during the administration of President Donald Trump.

The pact had already won support in October, in principle, from 136 governments under the auspices of the Organisation for Economic Cooperation and Development, and G-20 finance ministers endorsed a framework for the agreement in July.

The G-20’s endorsement of the deal stands out at a summit that looks unlikely to produce any additional substantial agreements. Leaders have failed to make serious progress on other prominent issues, including climate change and debt relief for low-income countries.

The tax pact has two sweeping objectives. It intends first to halt the effort by multinational companies to shift profits into low-tax havens through a new global minimum tax of 15 per cent for multinational companies. It also attempts to address the increasingly digital nature of international commerce by taxing companies, in part, on where they do business instead of where they book profits.

While the deal has overcome some major impediments — such as getting low-tax Ireland to sign on — it faces several potential snags before it comes into force and proves effective, including the creation of a credible dispute resolution mechanism.

Signatory countries must also follow through by enacting domestic legislation to implement the new tax rules and by formally approving a multilateral convention, to be drafted by the OECD.

The US and five European governments helped the agreement along with a side deal, announced Oct. 21. It allows the European countries to retain, for now, so-called digital services taxes on technology giants like Facebook Inc and Inc, which US officials said unfairly discriminated against American companies. That allows those nations to maintain revenues and keeps the pressure on Congress to approve the new rules over objections from top Republicans.

Tax credits

If and when a new global tax regime comes into force in the next two years, the European countries will offer a credit to effectively refund any taxes collected in excess of what corporations would pay under the global tax deal.

Despite the Biden administration’s hearty backing, the overall deal may still face its biggest challenge in the US, where it’s uncertain whether the president can convince enough lawmakers to approve the new reallocation of taxes.

While congressional Democrats can enforce the 15 per cent minimum tax on their own this fall as part of Biden’s proposed social-spending package, enacting the tax-reallocation portion may take several more months and will face stiff opposition from Republicans.

“The Biden administration retreated by failing to demand immediate repeal of discriminatory taxes, which will continue for years, if not indefinitely,” Senator Michael Crapo of Idaho and Representative Kevin Brady of Texas — the top two Republicans on Congress’s tax-writing committees — said in a statement on Oct. 22. “The administration simply settled for an empty promise — if we reform our tax laws to these countries’ satisfaction, then they will grant US businesses tax credits against future taxes.”