Some 130 countries have agreed on a global minimum tax backed by US President Joe Biden as part of a worldwide effort to keep multinational firms from dodging taxes by shifting their profits to countries with low rates.
The agreement is an attempt to address challenges presented by a globalised and increasingly digital world economy in which profits can be relocated across borders and companies can earn online profits in places where they have no taxable headquarters.
The deal calls for a global minimum tax of at least 15 per cent, a key element pushed by Mr Biden as he seeks to raise more revenue for his infrastructure and clean energy plans.
There are still technical details that need to be worked out and it would be at least 2023 before the agreement takes effect.
“Most important tax agreement in a century”
The agreement, announced by the Paris-based Organisation for Economic Co-operation and Development, also provides for taxing part of the profits the largest global companies in countries where they do business online but may have no physical presence.
French finance minister Bruno Le Maire called it “the most important international tax agreement in a century”.
Countries led by France have already started imposing unilateral digital taxes aimed at US tech giants such as Amazon, Google and Facebook. Under the deal, they would agree to withdraw those taxes, regarded as unfair trade practices by the US, in favour of the global approach.
The French tax on tech giants prompted retaliatory tariffs under former US president Donald Trump, and France has welcomed the Biden administration’s push to reach a global deal.
“Online giants must pay their faire share of taxes where they have activities,” he said. “There is no reason a small or medium business should pay more taxes than an online giant simply because it’s physically present in the country where it carries out its activities.”
US Treasury secretary Janet Yellen called it a “historic day”.
“For decades, the United States has participated in a self-defeating international tax competition, lowering our corporate tax rates only to watch other nations lower theirs in response,” she said in a statement.
“The result was a global race to the bottom: Who could lower their corporate rate further and faster?”
Ms Yellen said lower rates deprived countries of money for infrastructure, education and efforts to fight the pandemic.
Under the deal, countries could tax their companies’ foreign earnings up to 15 per cent if they go untaxed through subsidiaries in other countries. That would remove the incentive to use accounting and legal schemes to shift profits to low-rate countries where they do little or no business, since the profits would be taxed at home anyway.
Such tax avoidance practices cost countries between 100 billion and 240 billion dollars in lost revenue annually, according to the OECD.
Not all of the 139 countries that joined the talks signed on to the deal. Ireland’s finance ministry gave “broad support” to the approach in the agreement but could not agree to the 15 per cent minimum.
Finance minister Paschal Donohoe has said the country’s 12.5 per cent rate is “fair”.
Signers included Bermuda and the Cayman Islands, regarded by economists as tax havens, and major powers such as China and India.