130 countries around the world have agreed on a 15% minimum corporate tax rate, in a move designed to prevent what Treasury Secretary Janet Yellen called a “self-defeating international tax competition.”
The minimum corporate tax rate does not require countries to set their rates at the agreed floor but gives other countries the right to apply a top-up levy to the minimum on companies’ income coming from a country that has a lower rate. The new minimum rate of at least 15% would apply to companies with turnover above a 750-million-euro ($889-million)threshold, with only the shipping industry exempted.
The Group of Seven advanced economies agreed in June on a minimum rate of at least 15%. The broader agreement will go to the Group of Twenty major economies for political endorsement at a meeting in Venice next week.
Why it matters: Corporations will have to pay at least 15% no matter where they operate in the world. The OECD framework agreed to Thursday but many years in the making includes penalties for companies and jurisdictions attempting to bypass the rule.
The big picture: Companies have become experts at concentrating their profits in jurisdictions with low or zero corporate tax rates. (Switzerland, Ireland, and the Netherlands are all popular.) That tax dodge — which is entirely legal — will become much less attractive once this agreement comes into force.
How it works: The minimum rate will apply to large multinational companies. Any profitable firm with revenues over €20 billion ($24 billion) will be included from the start, with that number expected to decline to €10 billion ($12 billion) in time.
What’s next: The rules will be brought into domestic law in 2022 and will take effect in 2023.
The bottom line: Companies will retain broad latitude in where they pay tax; they just won’t have as much freedom as they currently do over whether they pay tax.
Global leaders seek to prevent large corporations from skipping out on tax days, helping raise money for public investment through standardizing the global tax code. The proposal centers around two pillars that call for a global minimum corporate rate of 15% and require companies to pay income tax where they sell goods and services. Though it indirectly targets tech firms, these companies largely report supporting the bill.
With this proposal, experts believe the devil will be in the details – and the final details are a long way off. Still, this global policy may represent a shift in the relationships between major governments and large corporations. “I wouldn’t underestimate the attempt here to do something multilateral,” Barton says. “Coming together and trying to unify certain aspects of the global system … that’s a big deal.”
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