By DAVID McHUGH, AP Business Writer
Many countries have agreed to fundamentally revise the taxation of the world’s largest companies when doing business across borders.
It is an attempt to cope better with a world where globalization and an increasingly digital economy mean that profits can easily be shifted from one jurisdiction to another. The deal was sealed on Thursday between 130 countries in talks led by the Paris-based Organization for Economic Co-operation and Development, although details remain to be worked out and hurdles to overcome before it can take effect in 2023.
The most important feature is a minimum global corporate income tax of at least 15%, which supports the broad lines of a proposal by US President Joe Biden.
While the tax deal is complex in its details, the idea behind the minimum tax is simple: if a multinational company evades taxation abroad, it would have to pay the minimum domestically.
Here’s why it was suggested and how it would work.
THE PROBLEM: STEUERHAFEN AND THE “RACE TO THE BOTTOM”
Most countries only tax the domestic business income of their multinational corporations, assuming that the profits of their foreign subsidiaries are taxed where they are generated.
But in today’s economy, profits can easily slide across borders. The revenues often come from intangible assets such as trademarks, copyrights and patents. These can easily be relocated to where taxes are lowest – and some jurisdictions have been all too willing to offer reduced taxes or no taxes at all to attract foreign investment and revenue, even when companies don’t do real business there.
As a result, corporate tax rates have declined in recent years, a phenomenon that Treasury Secretary Janet Yellen described as a “race to the bottom”.
From 1985 to 2018, the global average statutory corporate tax rate decreased from 49% to 24%. From 2000 to 2018, US companies posted half of all foreign profits in just seven low-tax countries: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland. The OECD estimates the cost of tax avoidance to be 100 to 240 billion US dollars, or 4 to 10 percent of global corporate tax revenues.
That’s money governments could use if they see deficits growing from spending on pandemic aid.
THE SOLUTION: THE GLOBAL MINIMUM TAX
The talks aim to go below corporate tax rates by enacting a minimum that countries would levy on untaxed foreign income. In other words, if Company X, headquartered in Country Y, paid little or no tax on profits in Country Z, Country Y would tax those profits domestically up to the minimum rate.
This would mean that the reason for using a tax haven or its establishment would no longer apply. Biden has suggested a lower limit of 15% for global talks, but it could be higher.
ANOTHER PROBLEM: TAXATION OF “DIGITAL” COMPANIES
Another focus is what to do with companies making profits in countries where they have no physical presence. That can be done through digital advertising or online retail. Countries led by France have begun imposing unilateral “digital” taxes, which hit the largest US tech companies like Google, Amazon and Facebook. The US calls this unfair trade practices and has threatened retaliation through import taxes.
THE SOLUTION: ASSIGNMENT OF TAX RIGHTS
Biden’s proposal focuses on the 100 largest and most profitable multinationals, regardless of what type of business they are in, digital or not. Countries could claim the right to tax part of their profits – up to 20% of the profits of companies above a profit margin of 10%, according to a proposal supported by the Group of Seven Wealthy Democracies. Governments would have to cut their unilateral taxes to defuse trade disputes with the US
The OECD talks play a role in Biden’s push for changes that he believes would make the tax system fairer and increase revenue for investments in infrastructure and clean energy. The US already enacted a tax on foreign income under the Trump administration. But Biden wants to roughly double the Trump-era rate to 21% and also calculate that rate from country to country so that tax havens can be attacked. The president also wants to make it harder for US companies to merge with foreign firms and avoid US taxes, a process known as inversion.
All of these changes have to be approved by the US Congress, where the Democratic President only has a slim majority. Biden wanted a diplomatic victory in the OECD talks so that other countries would impose some form of minimum tax to prevent companies from evading their potential tax obligations.
The agreement reached at the OECD is taken up by the group of 20 countries, which represent 80 percent of the world economy. All 20 G-20 countries, however, signed up to the signing of the OECD agreement, which, at least in outline, signals broad support. The G-20 could give its final blessing at a summit meeting in Rome from October 30th to 31st.
The global minimum tax would be voluntary. The countries would have to include it in their own national tax laws on their own initiative. The proposal to tax companies on profits when they are not physically present, for example by doing business online, would require countries to sign a written international agreement.
Some countries that participated in the OECD talks did not sign the agreement. These include Ireland and Hungary, which have corporate tax rates below the minimum of 15%. Ireland’s Treasury Secretary Paschal Donohoe said the Irish interest rate of 12.5% was “a fair rate”. Donohoe said Thursday after the deal was announced that, despite rate reservations, he remains “committed to the process” and is aiming to find “an outcome that Ireland can still support”.
According to Gabriel Zucman, an economics professor at the University of California at Berkeley who has written extensively on tax havens, the minimum tax will work even if some countries fail to register. He said in a tweet that “the fact remains: if some countries refuse to impose a minimum tax, other countries will collect the taxes they refuse to impose.”
AP Business Writer Josh Boak contributed from Washington, DC.
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