A deal was signed by 136 countries to ensure a minimum of a 15% tax rate is paid by companies. These countries account for more than 90% of the economy globally. This move is estimated to generate $150 billion more tax revenue globally on a yearly basis. This is an estimate, of course, from the entity that guided this negotiation, the OECD.
The Organization for Economic Cooperation and Development, or the OECD, stated that this deal is meant to make it harder for large companies to avoid their share of taxes. There are four countries that have yet to agree: Nigeria, Kenya, Sri Lanka, and Pakistan.
What the Minimum Rate Means
Budgets are tight everywhere, creating worry for future economic losses. Governments want to discourage profit shifting and tax shifting to countries with lower tax implications, regardless of where the initial revenue is made.
There has been a growing trend for income from sources such as royalties, patents, and software to get moved to countries with lower taxes. This allows larger companies to avoid paying their share of taxes where the money is made because the taxes would be too high.
This global minimum tax rate is hoped to lower the competition between governments for lower tax rates.
How Would This Deal Work?
This rate would apply to multinational firms that have more than $868 million in global sales and would apply to overseas profits. There would still be a local corporate tax that corporations can use. However, if the tax rate was lower in another country, it will now at least meet the minimum, removing the advantage of shifted profits.
Another part of the overhaul is a tax of 25% of the largest companies’ excess. To be clear, “excess” is considered over 10% of the profit over revenue.
The next step in this process is for the Group of 20 leaders to send finance ministers to endorse the deal. The goal is for it to be adopted by G20 leaders for the summit at the end of October. There are questions about what America will do, as it hinges partially on Biden’s domestic tax reform and whether it goes through.
This agreement requests countries get this passed as law by 2022 and in effect by 2023. This is cutting it tight since most tax deals take years to get placed. Those countries that have had national digital services created in recent years will have more adjusting to do.
The OECD believes there will be as much as $150 billion generated yearly. There will be taxing rights on over 125 billion profits additionally brought to countries they are earned in, representing a shift from countries with lower tax rates.
Did you find this article useful?
Subscribe to our newsletter for more!