World’s largest companies to pay more under global tax overhaul – POLITICO

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The world’s biggest companies like Facebook and Johnson & Johnson face an extra collective tax bill of hundreds of billions of dollars after 136 countries on Friday signed a detailed plan to overhaul international corporate tax rules.

The U.S., the U.K., China, India and all EU countries signed off on the international accord, negotiated under the stewardship of the Organization for Economic Cooperation and Development. Kenya, Nigeria, Pakistan and Sri Lanka were the handful of the 140 nations involved in the negotiations that decided against signing on.

The deal aims to ensure that the world’s 100 biggest companies pay taxes on their operations and sales around the globe, while introducing an international effective minimum corporate tax rate of 15 percent. The global tax rate would allow countries, collectively, to pocket an additional $150 billion in yearly tax revenue, while the levy would split a separate $125 billion in corporate tax receipts between participating governments worldwide.

The global deal, which must still be approved by G20 leaders later this month and will likely take at least two years to implement, represents the first wholesale revamp of the corporate tax regime in decades. It comes amid ongoing tension between the U.S. and Europe over how these proposals should apply to companies operating in their jurisdictions. Officials worldwide are seeking new revenue sources to pay for the economic recovery associated with the COVID-19 crisis.

“This will make our international tax system fairer and work better,” the OECD’s secretary-general, Mathias Cormann, tweeted after sealing the deal. “It’s a major victory for effective and balanced multilateralism. It’s a far-reaching agreement which ensures our international tax system is fit for purpose in a digitalised and globalised world economy.”

The two so-called pillars of the deal are designed to make it much harder for digital giants and multinational companies to shift their profits around the globe and dodge countries’ tax authorities through clever — and legal — accounting. 

The minimum tax rate, so-called Pillar Two, is also supposed to stop companies seeking to park their profits in tax havens — an ongoing problem, most recently publicized in the Pandora Papers. The so-called Pillar One will distribute corporate tax profits, above a certain threshold, to countries wherever they sell goods and services.

Years of negotiating have gone into the international agreement following national efforts, mostly in the EU, to tax U.S. tech companies like Amazon and Facebook. Those domestic levies had threatened a global trade war — especially between the EU and the U.S. The accord is aimed at ending those tensions and making it harder for companies to shift their profits to sidestep countries’ existing tax regimes.

Critics claim that the overhaul disproportionally benefits Western countries, while potentially hamstringing governments’ ability to set their own tax rates to entice international investment to their shores.

“The expected agreement would see rich OECD countries take the great bulk of new revenues, and would also sharply limit the freedom of others to set their tax rules and defend their tax bases,” said Alex Cobham, chief executive at the Tax Justice Network. “Perhaps it has always been naïve to expect a club of rich countries to deal with tax abuse, when the club’s members and their dependencies are the leading perpetrators of that abuse.”

Finance ministers from G20 countries are scheduled to approve the deal when they gather in Washington next week. Those countries’ leaders are expected to endorse the accord at the end of the month, kickstarting the difficult task of implementing the rules by the end of 2023.

Fine print

Many of the signatories had already committed to the overhaul in July, when the OECD first unveiled the broad lines of the agreement. But there were some holdouts, notably Ireland, which balked at the July statement’s reference to setting a minimum tax rate of “at least” 15 percent. Those two words have since disappeared. 

The deal announced Friday is more detailed than its predecessor and adapted for countries, especially in the EU, to get on board. The new fine print was vital to winning over Ireland after Dublin recoiled at the prospect of giving up its decade-old corporate tax rate of 12.5 percent. That won’t be the case, as the OECD’s international rate will only target companies with annual revenues of at least €750 million. That allows the Irish to keep their existing tax regime, while applying a so-called surcharge of 2.5 percentage points to the largest international companies headquartered in the Emerald Isle.

Changes to establish a global minimum corporate tax rate will likely be approved by countries worldwide sometime next year.

Under a complex formula for Pillar One — in which 25 percent of the profits for companies with at least a profit margin of 10 percent and annual revenues of at least $20 billion will be divided up globally — governments will be able to capture additional tax revenue from the world’s largest companies, based on how sizeable their operations are within each jurisdiction. Those changes are expected to come into force by 2023. 

Friday’s deal also includes tax deductions for certain corporate assets and a pledge to withdraw national taxes against tech giants in the coming years. The European Commission will, however, be free to propose a separate EU digital levy, as long as it applies to many companies at a very low rate. Washington had successfully lobbied Brussels to postpone those plans until a final OECD agreement could be reached.

As part of the final agreement, companies will be able to access tax breaks, under the minimum corporate tax rate proposals, allowing these firms to deduct some of the value they hold in physical assets and in payroll in countries where they have operations. These deductions will decrease from 8 percent and 10 percent, respectively, to 5 percent over 10 years.

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