[Global] The global minimum tax deal agreed by 136 countries

On October 8, a global deal to ensure that big companies pay a minimum tax rate of 15 per cent and make it harder for them to avoid taxation has been agreed upon by 136 countries, according to the Organisation for Economic Cooperation and Development (OECD), Deccan Chronicle reports.

The OECD said four countries - Kenya, Nigeria, Pakistan and Sri Lanka - had not yet joined the agreement, but that the countries already behind the accord together accounted for over 90 per cent of the global economy.

Why a global minimum tax?

With budgets strained in the wake of the COVID-19 crisis, a number of governments have grown increasingly keen to discourage multinationals from shifting profits and tax revenues to low-tax countries regardless of where their sales are made.

Income from intangible sources such as drug patents, software and royalties on intellectual property has progressively migrated to these jurisdictions, allowing companies to avoid paying higher taxes in their traditional home countries.

The minimum tax and other provisions reportedly aim to put an end to decades of tax competition between governments to attract foreign investment.

How a deal would work

The global minimum tax rate would apply to overseas profits of multinational firms with 750 million euros ($868 million) or above in sales globally.

Governments would still be able to set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could "top up" their taxes to the 15 per cent minimum, eliminating the advantage of shifting profits.

The second track of this overhaul would allow countries where revenues are earned to tax 25 per cent of the largest multinationals' ‘excess’ profit; which is defined as profit in excess of 10 per cent of revenue.

What will happen next

After the October 8 agreement of the technical details, the next step is for finance ministers from the Group of 20 economic powers to formally endorse the deal, paving the way for adoption by G20 leaders at a summit at the end of October.

However, there are lingering questions about the US position which hinges, in part, on a domestic tax reform the Biden administration wants to push through the US Congress.

The agreement calls for countries to bring it into law in 2022 so that it can take effect by 2023. This is an extremely tight time frame considering that previous international tax deals took years to implement.

Countries that have created national digital services taxes in recent years will have to repeal them.

The economic impact

The OECD has steered the negotiations, it estimates the minimum tax will generate $150 billion in additional global tax revenues annually.

Additionally, taxing rights on more than $125 billion of profit will be shifted to the countries where they are earned from the low tax countries where they are currently booked.

Economists expect that the deal will encourage multinationals to repatriate capital to their country of headquarters, giving a boost to those economies.

However, various deductions and exceptions contained within the deal are at the same time designed to limit the impact on low tax countries like Ireland, where many US groups have based their European operations.

On October 8, a global deal to ensure that big companies pay a minimum tax rate of 15 per cent and make it harder for them to avoid taxation has been agreed upon by 136 countries, according to the Organisation for Economic Cooperation and Development (OECD), Deccan Chronicle reports.

The OECD said four countries - Kenya, Nigeria, Pakistan and Sri Lanka - had not yet joined the agreement, but that the countries already behind the accord together accounted for over 90 per cent of the global economy.

Why a global minimum tax?

With budgets strained in the wake of the COVID-19 crisis, a number of governments have grown increasingly keen to discourage multinationals from shifting profits and tax revenues to low-tax countries regardless of where their sales are made.

Income from intangible sources such as drug patents, software and royalties on intellectual property has progressively migrated to these jurisdictions, allowing companies to avoid paying higher taxes in their traditional home countries.

The minimum tax and other provisions reportedly aim to put an end to decades of tax competition between governments to attract foreign investment.

How a deal would work

The global minimum tax rate would apply to overseas profits of multinational firms with 750 million euros ($868 million) or above in sales globally.

Governments would still be able to set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could "top up" their taxes to the 15 per cent minimum, eliminating the advantage of shifting profits.

The second track of this overhaul would allow countries where revenues are earned to tax 25 per cent of the largest multinationals' ‘excess’ profit; which is defined as profit in excess of 10 per cent of revenue.

What will happen next

After the October 8 agreement of the technical details, the next step is for finance ministers from the Group of 20 economic powers to formally endorse the deal, paving the way for adoption by G20 leaders at a summit at the end of October.

However, there are lingering questions about the US position which hinges, in part, on a domestic tax reform the Biden administration wants to push through the US Congress.

The agreement calls for countries to bring it into law in 2022 so that it can take effect by 2023. This is an extremely tight time frame considering that previous international tax deals took years to implement.

Countries that have created national digital services taxes in recent years will have to repeal them.

The economic impact

The OECD has steered the negotiations, it estimates the minimum tax will generate $150 billion in additional global tax revenues annually.

Additionally, taxing rights on more than $125 billion of profit will be shifted to the countries where they are earned from the low tax countries where they are currently booked.

Economists expect that the deal will encourage multinationals to repatriate capital to their country of headquarters, giving a boost to those economies.

However, various deductions and exceptions contained within the deal are at the same time designed to limit the impact on low tax countries like Ireland, where many US groups have based their European operations.