14.2 C
New York
Thursday, October 28, 2021

Nations agree to 15% minimum corporate tax rate

IDBS ART GALLERY

Most of the world’s nations have signed up to a historic deal to ensure big companies pay a fairer share of tax.

136 countries agreed to impose a corporate tax rate of at least 15%, as well as a more equitable system of taxing profits where they are earned.

It comes as a result of concerns that multinational corporations are re-routing their profits through low-tax jurisdictions in order to reduce their tax bills.

However, critics argue that a 15% rate is too low and that businesses will find ways to get around the rules.

UK Chancellor Rishi Sunak stated that the agreement would “modernise the global tax system.”

“We now have a clear path to a fairer tax system,” he said, “where large global players pay their fair share wherever they do business.”

For over a decade, the Organization for Economic Cooperation and Development (OECD), an intergovernmental organisation, has led negotiations on a minimum rate.

It claimed that the agreement could generate an additional $150 billion (£108 billion) in tax revenue per year, bolstering economies as they recover from Covid.

It also stated that it does not intend to “eradicate” tax competition between countries, but rather to limit it.

The corporate tax floor will be implemented beginning in 2023. Countries will also have more leeway in taxing multinational corporations operating within their borders, even if they do not have a physical presence.

Many big global companies, such as Google, have bases in Ireland which has a corporate tax rate of just 12.5%

The move, which is expected to affect digital behemoths such as Amazon and Facebook, will affect companies with global sales exceeding 20 billion euros (£17 billion) and profit margins exceeding 10%.

A quarter of any profits they make above the 10% threshold will be reallocated and taxed in the countries where they were earned.

“[This] is a broad agreement that ensures our international tax system is fit for purpose in a digitalized and globalised world economy,” said OECD Secretary-General Mathias Cormann.

“We must now work quickly and diligently to ensure that this major reform is implemented effectively.”

This agreement represents a sea change in how big global corporations are taxed.

Previously, countries would frequently compete with one another to offer an enticing deal to multinational corporations. It made sense when those companies were rumoured to be coming in, establishing a factory, and creating jobs. They were, in a sense, giving something back.

However, the new digital era behemoths have mastered the art of simply shifting profits from the regions where they do business to those where they will pay the least taxes. Good news for tax havens, bad news for the rest of us.

The new system is intended to reduce profit shifting opportunities and ensure that the largest corporations pay at least some of their taxes where they do business, rather than where they choose to have their headquarters.

A total of 136 countries have signed on, which is a significant accomplishment in and of itself. However, there will inevitably be losers as well as winners.

Presentational grey line

‘Race to the bottom’

When the initial OECD proposals were announced in July, they received support from more than 100 countries.

Ireland, Hungary, and Estonia, all of which have corporate tax rates of less than 15%, initially resisted but are now on board. Kenya, Nigeria, Pakistan, and Sri Lanka, on the other hand, have yet to sign on to the agreement.

The agreement also settles a dispute between the United States and countries such as the United Kingdom and France, which had threatened a digital tax on large, primarily American, technology firms.

“As of this morning, virtually the entire global economy has decided to end the race to the bottom on corporate taxation,” said US Treasury Secretary Janet Yellen.

“Rather than competing on our ability to offer low corporate rates, America will now compete on the skills of our workers and our ability to innovate, and this is a race we can win.”

According to Oxfam, a 15% tax rate is too low and would do “little or nothing to end harmful tax competition.” It believes that firms should pay at least 25% of their earnings regardless of where they are located.

According to its international executive director Gabriela Bucher, “[the 15% rate] is already being seen as an excuse by some in Australia and Denmark to lower domestic corporate tax rates, risking a new race to the bottom.”

SourceBBC
- Advertisement -

More articles

LEAVE A REPLY

Please enter your comment!
Please enter your name here

- Advertisement -

Latest article