Frankfurt: More than 130 countries have forged a deal on sweeping changes in how big global companies are taxed.
The goal: deterring multinational companies from stashing profits in countries where they pay little or now taxes _ better known as tax havens.
The sweeping agreement was struck Friday among 136 countries after talks overseen by the Organization for Economic Cooperation and Development (OECD). It would update a century’s worth of international taxation rules to cope with changes brought by digitalization and globalization.
The most important feature: a global minimum tax of at least 15 per cent, a key initiative pushed by US President Joe Biden and Treasury Secretary Janet Yellen. Yellen said the minimum tax will end a decadeslong ``race to the bottom’’ that has seen corporate tax rates fall as tax havens sought to attract corporations that take advantage of low rates _ but do little actual business in those locations.
Here’s a look at key aspects of the deal:
What problems does it address?
In today’s economy, multinationals are increasingly likely to earn profits from intangibles such as trademarks and intellectual property. Those can be easy to move, and global companies can assign the earnings they generate to a subsidiary in a country where tax rates are very low.
Some countries compete for revenue by using rock-bottom rates to lure companies, attracting huge tax bases that generate large revenue even when tax rates only marginally above zero are applied. Between 1985 and 2018, the global average corporate headline rate fell from 49% to 24%. By 2016, over half of all U.S. corporate profits were booked in seven tax havens: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore, and Switzerland. That costs the U.S. Treasury $100 billion a year according to one estimate.
How would a global minimum tax work?
The basic idea is simple: Countries would legislate a global minimum corporate tax rate of at least 15% for very big companies, those with annual revenues over 750 billion euros ($864 billion.)
Then, if companies have earnings that go untaxed or lightly taxed in one of the world’s tax havens, their home country would impose a top-up tax that would bring the rate to 15 per cent.
That would make it pointless for a company to use tax havens, since taxes avoided in the haven would be collected at home. For the same reason, it means the minimum rate would still take effect even if individual tax havens don’t participate.
How would the plan address the digitalised economy?
The plan would also let countries tax part of the earnings of the 100 or so biggest multinationals when they do business in places where they have no physical presence. That could be through internet retailing or advertising. The tax would only apply to a portion of profits above a profit margin of 10%.
In return, other countries would abolish their unilateral digital services taxes on U.S. tech giants such as Google, Facebook and Amazon. That would head off trade conflicts with Washington, which argues such taxes unfairly target U.S. companies and has threatened to retaliate with new tariffs.
Does everyone like the deal?
Some developing countries and advocacy groups such as Oxfam and the UK-based Tax Justice Network say the 15% rate is too low and leaves far too much potential tax revenue on the table. And although the global minimum would capture some $150 billion in new revenue for governments, most of it would go to rich countries because they are where many of the biggest multinationals are headquartered.
A 20% to 30% minimum was recommended by the UN’s high-level panel on International Financial Accountability, Transparency and Integrity. In a report earlier this year, the panel said that a rate that is too low can incentivize countries to lower their rate to remain competitive.
Countries that participated in the talks but did not sign the agreement were Kenya, Nigeria, Pakistan and Sri Lanka.
In a major reform of the international tax system, 136 countries, including India, have agreed to an overhaul of global tax norms to ensure that multinationals pay taxes wherever they operate and at a minimum 15 per cent rate.
However, the deal requires countries to remove all digital services tax and other similar measures and to commit not to introduce such measures in the future, as per the Organisation of Economic Cooperation and Development (OECD) implementation plan released late on Friday.
"No newly enacted digital services taxes or other relevant similar measures will be imposed on any company from October 8 and until the earlier of December 31, 2023, or the coming into force of the MLC (multilateral convention)," the OECD said.
The proposed two-pillar solution of the global tax deal consists of two components - Pillar One which is about reallocation of additional share of profit to the market jurisdictions and Pillar Two consisting of minimum tax and subject to tax rules.
Finance Minister Nirmala Sitharaman had earlier this week said that India is "very close" to arriving at the specifics of the two-pillar taxation proposition at the G-20 and is in the last stage of finalising the details.
The Finance Ministers of G-20 countries are scheduled to meet on October 13 in Washington and finalise it.
Nangia Andersen Partner Sandeep Jhunjhunwala said the statement released by the OECD on Friday weighed against the one in July 2021 brings out some interesting observations, on which taxmen and taxpayers had their eyes laid on.
"As a significant move, the OECD has sought for an immediate and upfront withdrawal of unilateral digital services tax and a commitment not to introduce such measures in the future.
'No newly enacted digital services taxes or other relevant similar measures would be imposed on any company from October 8 and until the earlier of December 31, 2023, or the coming into force of the multilateral convention," he said.
The modality for the removal of existing digital services taxes and other relevant similar measures needs to be appropriately coordinated, Jhunjhunwala added.
"Pillar Two which was initially proposed to be brought into effect from 2023 has now been deferred to 2024," he added.
Deloitte India Partner Sumit Singhania said the two pillar solutions finally agreed will result in redistribution of USD 125 billion taxable profits annually, and ensure global MNEs pay minimum 15 percent tax once these measures are implemented in 2023 through a multilateral convention to be signed next year.
Consensus on global minimum tax will practically make tax competition amongst nations rather unfeasible by narrowing down any such opportunities to rarest circumstances, he said.
"In reaching final Two-pillar solutions, OECD Inclusive Framework has tied up several loose ends and drawn the roadmap to its implementation. The final solution offers 25 percent share in super normal profits (i.e. profits in excess of 10 per cent) sought to be reallocated to market countries," Singhania said
He said the signing of MLI will also lead to consistent withdrawal of digital Services tax and any such similar taxes /levies, and will prevent any future enactment of such order.
"In the end, two pillar solutions ought to be reckoned as enduring overhaul of the century old international tax regime, that's here to change the rule of the global profit allocation amongst taxing jurisdictions completely," Singhania added.
Shardul Amarchand Mangaldas & Co. Partner Gouri Puri said a consensus on Pillar 1 and Pillar 2 are key to secure a more certain and stable tax regime for multinationals and governments.
"While the fine print is awaited, India is balancing its interests both as an importer and an exporter of capital, goods and services. The deal will prevent a race to the bottom amongst countries," Puri added.
What is the US role in the deal?
Biden’s tax agenda is stuck in negotiations among Democratic lawmakers, as the scope of his spending and proposed rate hikes are still under debate. But the administration has staked a claim in saying that it must expand the U.S. global minimum tax in order to convince other nations to do so.
Biden has retreated somewhat from his initial proposals as Congress has provided its input. The latest plan from the House Ways and Means Committee would increase global minimum tax to roughly 16.5% from 10.5%. The president initially wanted 21% as the U.S. global minimum rate. Domestic corporate income would be taxed at 26.5%, up from 21 per cent currently.
U.S. participation in the minimum tax deal is crucial, simply because so many multinationals are headquartered there. Complete rejection of Biden’s global minimum proposal would seriously undermine the international deal.
Manal Corwin, a tax principal at professional services firm KPMG and a former Treasury Department official in the Obama administration, said that the removal of the unilateral digital taxes, or DST’s, would provide ``a very strong motivation’’ for the U.S. to participate. That is because the agreement would head off destructive trade dispute that could spread to unrelated companies in other sectors of the economy.
``When you get into back-and-forth threats of tariffs, the tariffs are not necessarily imposed on the companies that are in the crosshairs of the issue being debated,” she said. ``It may be DSTs today and then tomorrow it’s some other unilateral measure.’’ She said international taxation needs stability and consensus ``to encourage investment and growth .... (T)he unravelling of global consensus, if it starts with DSTs, can expand to other things.’’
How would the agreement take effect?
The accord will go to the Group of 20 leaders. Agreement there is likely since all 20 members signed Friday’s deal. Implementation then moves to the individual countries.
The tax on earnings where companies have no physical presence would require countries to sign up to an intergovernmental agreement during the course of 2022, with implementation in 2023. The global minimum could be applied by individual countries using model rules developed by the OECD. If the U.S. and European countries where most multinationals are headquartered legislate such minimums, that would have much of the intended effect.