By DAVID MCGUGH, AP Business Writer
FRANKFURT, Germany (AP) – Around 130 countries have agreed on a global minimum tax, backed by U.S. President Joe Biden, to deter multinational corporations from evading taxes by shifting their profits to low-rate countries.
The deal, announced on Thursday, is an attempt to address the challenges of a globalized and increasingly digital economy, where profits can be relocated across borders and businesses can make online profits in places where they do not have a taxable headquarters.
The deal provides for a minimum global tax of at least 15%, a key element that Biden is pushing to generate more revenue for its infrastructure and clean energy plans. There are still technical details to be worked out and it would be at least 2023 before the agreement comes into force.
The deal, announced by the Paris-based Organization for Economic Co-operation and Development, also provides for the taxation of part of the profits of the largest global companies in countries where they do business online but may not have a physical presence.
The French Finance Minister Bruno Le Maire called it “the most important international tax treaty in a century”.
Countries led by France have already begun imposing unilateral digital taxes targeting US tech giants like Amazon, Google and Facebook; Under the deal, they would agree to deduct these taxes, which the US regards as unfair trade practices, in favor of the global approach.
The French tax on tech giants sparked retaliatory tariffs under former US President Donald Trump, and France welcomed the Biden administration’s efforts to reach a global deal.
“Online giants have to pay their fair share of taxes wherever they do business,” he said. “There is no reason why a small or medium-sized business should pay more tax than an online giant just because it is physically present in the country where it does business.”
US Treasury Secretary Janet Yellen called it a “historic day”.
“The United States has participated in a self-destructive international tax competition for decades, lowering our corporate tax rates just to see other nations lower theirs in response,” she said in a statement. “The result was a global race to the bottom: who could cut their corporate rate further and faster?”
Yellen said lower interest rates had drained countries of money for infrastructure, education and efforts to fight the pandemic.
Manal Corwin, tax director at professional services firm KPMG and a former Treasury Department official, said the deal was “the big pieces” of an overall agreement, although the technical complexities have yet to be worked out. She said what was approved was “pretty much the US proposal”. It is “extremely important” that the US commit to other countries to deduct their unilateral digital taxes.
Under the agreement, countries could tax the foreign profits of their companies at up to 15% if they remain untaxed through subsidiaries in other countries. That would remove the incentive to shift profits through accounting and legal regulations to low-interest countries where they do little or no business, since profits would be taxed domestically anyway.
Not all of the 139 countries that have joined the talks have agreed to the agreement. The Irish Treasury Department said it had “broad support” for the approach used in the agreement but could not agree to the 15% minimum. Finance Minister Paschal Donohoe said the 12.5% rate was a “fair rate”.
Signatories included Bermuda and the Cayman Islands, viewed by economists as tax havens, as well as major powers such as China and India.
Further discussion is expected at next week’s meeting of G-20 finance ministers in Venice before final approval by the full G-20 summit of heads of state and government in October. The proposal to tax companies that have revenue but no physical presence would require countries to join a multilateral convention, while the minimum corporate tax rate could be set by each country on a voluntary basis through national law.
Tax experts say a voluntary approach could work if adopted by countries where many multinational corporations are headquartered, such as the US and Europe, by making it clear to companies that these profits will be taxed even if they are taxed Avoid by making profits to overseas affiliates shifting your home to a minimum.
In the US, Biden has proposed a minimum rate of 21% on overseas profits of large US companies to deter them from shifting profits to tax havens. Biden’s US tax has to pass through Congress, where the Democratic President has only a slim majority.
Associated Press Writer Angela Charlton in Paris contributed to this report.
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