The deal is an attempt to address the ways globalisation and digitalisation have changed the world economy.
Nearly 140 countries have agreed on a tentative deal that would make sweeping changes to how big, multinational companies are taxed in order to deter them from stashing their profits in offshore havens where they pay little or no tax.
Under the agreement announced Friday, countries would enact a global minimum corporate tax of 15 percent on the biggest, internationally active companies. United States President Joe Biden has been one of the driving forces behind the agreement as governments around the world seek to boost revenue following the COVID-19 pandemic.
“Today’s agreement represents a once-in-a-generation accomplishment for economic diplomacy,” US Treasury Secretary Janet Yellen said in a statement.
The agreement was announced by the Paris-based Organization for Economic Co-operation and Development, which hosted the talks that led to it.
The deal is an attempt to address the ways globalisation and digitalisation have changed the world economy. Alongside the minimum tax, it would allow countries to tax part of the companies whose activities, such as online retailing or web advertising, don’t involve a physical presence.
On Thursday, Ireland announced that it would join the agreement, ditting the low-tax policy that has led companies like Google and Facebook to base their European operations there.
Although the Irish agreement was a step forward for the deal, developing countries have raised objects and Nigeria, Kenya, Pakistan and Sri Lanka have indicated they will not sign up.
Anti-poverty and tax fairness advocates have said the bulk of new revenue would go to wealthier countries and offer less to developing countries that are more dependent on corporate taxes. The Group of 24 bloc of developing countries said that without a bigger share of revenue from reallocated profits, the deal would be “sub-optimal” and “not sustainable even in the short run”.
The deal must clear several more hurdles. It will be taken up by the Group of 20 leaders at a summit in Rome from October 30 to 31. Then, the part of the deal that reallocates the right to tax corporate profits to where goods and services are consumed would ask countries to sign up to a diplomatic agreement.
The global minimum, on the other hand, could simply be enacted by countries in coordinated unilateral action. A top-up provision would mean tax avoided overseas would have to be paid at home. So long as at least the major headquarters countries implement the minimum tax, the deal would have most of its desired effect.
US approval of related tax legislation proposed by Biden will be key, especially since the US is home to many of the biggest multinationals. A rejection by the US Congress would cast uncertainty over the entire project.