US proposal for 15% global minimum tax wins support from 130 countries

An effort to push the most sweeping changes to the global tax system in a century gained significant momentum Thursday when 130 nations agreed to a blueprint in which multinational corporations would pay a fair share of tax wherever they operate.

The deal approaches a goal that had proved elusive for the global community for decades as countries tried to prevent businesses from shopping for the jurisdiction with the lowest rates — what Treasury Secretary Janet Yellen called a 30-year “race to the bottom” on corporate tax.

The result of the negotiations, overseen by the Paris-based Organization for Economic Cooperation and Development and revived this year by President Joe Biden, is also remarkable because it includes China, Russia and India among the signatories — large economies that had been wary of a tax overhaul.

The framework includes a 15% minimum corporate tax rate, which had been proposed by the United States, and rules that would force technology giants like Amazon and Facebook and other big global businesses to pay taxes in countries where their goods or services are sold, even if they have no physical presence there.

Closing some of the most notorious tax loopholes in the world will generate an estimated $150 billion in additional tax revenue each year, the OECD said, reshaping global commerce and shoring up finances that have deteriorated in numerous countries after more than a year of grappling with the pandemic.

A final deal could also end a brewing global trade war over the taxation of companies like Amazon, Google, Facebook and others that earn revenue online across the globe. Those efforts have prompted both the Trump and Biden administrations to threaten retaliatory tariffs in response.

“Today marks an important step in moving the global economy forward to be more equitable for workers and middle-class families in the United States and around the world,” Biden said in a statement.

“With a global minimum tax in place, multinational corporations will no longer be able to pit countries against one another in a bid to push tax rates down and protect their profits at the expense of public revenue,” he said.

The blueprint was originally approved by Group of 7 nations in June. Ministers from the Group of 20 major economies will hash out further details next week at a summit in Italy.

The deal comes after four years of fraught international negotiations. If enacted, it would essentially stop countries from slashing their tax rates to lure businesses, a move that the United States and other high-tax jurisdictions say has deprived them of funding for crucial investments like infrastructure and education.

Critical details still need to be worked out, including how to execute the plan, which is expected to be finalised in October, the OECD said. And after that, new digital taxes and global corporate minimum taxes would still need to be approved by Congress and national legislatures.

The OECD estimates over $100 billion of corporate profits would be reallocated from companies’ home countries to other markets where they operate. Large emerging markets like India are expected to reap a tax windfall, though a big chunk would also go to wealthy countries like France and Germany, which are keen to prevent their tax base from shrinking as more commerce moves online.

The agreement is a victory for the Biden administration, which reinvigorated the negotiations this year with a new proposal for a global minimum tax. But it also builds on groundwork laid by Treasury Department negotiators under President Donald Trump.

Still, not everyone has signed on. Smaller nations that have long benefited from being tax havens are holding out for better terms.

Ireland in particular has resisted a 15% minimum tax and refused to sign Thursday’s deal, reluctant to lose its status as a major tax haven in Europe. Its low corporate tax rate of 12.5% helped fuel the so-called Celtic Tiger economy for years, attracting Apple, Google, Pfizer and a who’s who of US multinationals that have been able to avoid paying taxes in other jurisdictions and have brought billions in tax income to Ireland’s coffers.

The Irish government has said that a deal would need to allow small countries to continue to compete with large ones to make up for the loss of any tax advantage. Finance Minister Paschal Donohoe said in a statement that Ireland would remain engaged in the negotiations and would seek a “comprehensive, sustainable and equitable agreement.”

Breezy Caribbean island tax havens also declined to sign on, including Barbados, St. Vincent and the Grenadines. Hungary and Estonia, which are keen to preserve their ultralow tax regimes, joined the dissenters, as did Kenya, Nigeria, Peru and Sri Lanka.

France, which has led the charge for a tax on digital giants in particular, signalled it would work to bring reluctant countries in line. “I will ask them to make all the necessary efforts to join this historic agreement,” Finance Minister Bruno Le Maire said.

OECD officials had hoped to seal the framework last year, but their efforts were delayed by the pandemic and by a twist in the Trump administration’s stance as it effectively sought to allow some American companies to choose their tax treatment worldwide. Biden’s team dropped that insistence.

Yellen cast the framework as a victory for tax fairness, saying that decades of competition among countries to reduce tax rates to woo corporations “not only failed to attract new businesses, they have also deprived countries of funding for important investments like infrastructure, education and efforts to combat the pandemic.”

In place of that race to reduce rates, she said, “America will enter a competition that we can win; one judged on the skill of our workers and the strength of our infrastructure.”

Conservative economists — including some who served in Trump’s administration — have praised global efforts to reduce corporate taxes, predicting they would bolster economic growth and worker incomes.

Yet for all the talk of fairness, critics said the plan was hardly watertight.

Alex Cobham, CEO of the Tax Justice Network, an advocacy group based in London that fights tax avoidance, said that although a higher effective minimum tax rate would benefit most countries — including the richest — the OECD plan “gives little to lower-income countries and leaves much of the incentive for profit shifting intact.”

Challenges remain for the agreement and for Biden’s goal of reducing the offshoring of profits, which the president acknowledged in his statement.

The Biden administration has proposed a new tax plan that would effectively punish companies with headquarters in those holdout countries but that operate in the United States by raising their tax liabilities significantly. Biden has pushed Congress to approve that tax change, along with an increased minimum tax on revenue earned by American companies outside the United States, to help fund his $4 trillion economic agenda that he hopes to pass this summer.

“Building on this agreement will also require us to take action here at home,” Biden said Thursday. “We must adopt the global minimum tax, among other measures I have proposed, to make sure corporations pay their fair share.”

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