How does the G20 subsidized minimum corporate tax rate work?

Rome (AFP) – Leaders of the Group of Twenty summit in Rome expressed broad support for fundamental changes in the way major global companies are taxed.

The goal: to prevent multinational corporations from making profits in countries with little or no taxes, known as tax havens.

The proposal was finalized by 136 countries in October and sent to the G20 for final consideration after complex discussions overseen by the Organization for Economic Cooperation and Development. It will update outdated international tax rules to keep pace with the changes brought about by digitization and globalization.

Its main advantage: a minimum global tax of at least 15%, a major initiative of US President Joe Biden. “This is more than just a tax deal – it’s diplomacy that is reshaping our global economy and serving our people,” Biden said in a tweet from the summit on Saturday.

Treasury Secretary Janet Yellen said she would end decades of a “race to the bottom” with low corporate tax rates as tax havens tried to lure companies with smart accounting to take advantage of lower rates in countries with little real activity.

Here is an overview of the main aspects of a tax agreement:

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What is the problem?

In today’s economy, multinational corporations can make significant profits from things like trademarks and intellectual property that can be easily extracted from factories. Companies can allocate the profits they make to a subsidiary in a country where tax rates are very low.

Some countries compete for revenue using very low rates to attract business and attract huge tax bases that generate significant revenue, even with tax rates marginally above zero. Between 1985 and 2018, the global average number of business addresses fell from 49% to 24%. In 2016, more than half of US corporate profits were made in seven tax havens: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland. White House officials say the global minimum would result in nearly $60 billion in US tax revenue.

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How does the global minimum tax work?

The basic idea is simple: countries will offer a minimum rate of at least 15% to very large companies with annual turnover of more than 750 million euros ($864 million)

If the company’s profits are not taxed or even slightly taxed in one of the world’s tax havens, the country of origin will impose an increased tax rate that will increase the rate to 15%.

This will make it unfeasible for the company to use tax havens, as taxes evaded at the port will be collected at home.

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How does the tax plan address the digital economy?

The plan would also allow states to tax some of the profits of roughly the 100 largest multinationals when they do business in places where they don’t have a physical presence, such as online retail or advertising. The tax is applied only to the portion of the profit that is greater than 10% of the profit margin.

In return, other countries will eliminate unilateral taxes on digital services imposed on US tech giants such as Google, Facebook and Amazon. This avoids trade disputes with Washington, which says such taxes unfairly target US companies.

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What is the role of the United States in the agreement?

Biden gambled on the claim that the United States should join the global minimum tax rate to get other countries to do so. This includes increasing the current foreign income ratio from 10.5% to reflect the global minimum. His tax proposals are still being negotiated in Congress.

US participation in the minimal tax deal is crucial simply because it is where many multinational corporations are located – 28% of the world’s 2000 largest. A complete rejection of Biden’s global minimum proposal would seriously undermine the international deal.

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Does everyone like the deal?

Some developing countries and advocacy groups such as Oxfam and the UK-based Tax Justice Network say the 15% rate is too low. While the global outcome will generate about $150 billion in new revenue for governments, most of it will go to rich countries because that is where many of the largest multinational corporations are located. Developing countries participated in the talks and all of them signed except Nigeria, Kenya, Pakistan and Sri Lanka.

US critics, including Republican leaders and a number of business groups, say the proposed minimum tax will make America less competitive and potentially cost jobs, suggesting that the key is transit from other countries, so the US is not in a disadvantage favorable.

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Which of the other caves?

The EU Tax Control Research Consortium warns that exemptions for companies with physical assets and employees in a particular country “could exacerbate tax competition by giving companies incentives to move real business to tax havens”.

This means that some tax competition between countries will still be possible when actual business activities – as opposed to vulgar accounting – exist.

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How will the agreement enter into force?

The support of the G20 leaders complements a long-term negotiation process. Once approval appears in the summit’s closing statement, which is expected on Sunday, implementation will be transferred to individual countries.

The tax on profits in which companies have no physical presence requires countries to sign an intergovernmental agreement in 2022, with implementation in 2023. The global minimum can be applied by individual countries using the model rules established by the Organization for Economic Cooperation and Development. If the US and European countries where most multinational corporations are based impose such minimums, they would have largely the intended effect, even if some tax havens do not.

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Associated Press writer Joshua Bock in Washington contributed to this report.