PARIS AND NEW YORK — After years of negotiation, 136 countries, including the United States and members of the European Union, reached a global agreement to create a 15% minimum tax on multinationals, the Organization for Cooperation reported on Friday and Economic Development (OECD), which led the negotiations.
The goal is to curb evasion in tax havens and also find a way to tax large technology companies, which have global operations and, today, pay little tax. The deal is billed as the biggest corporate tax reform in more than a century.
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According to OECD estimates, with the new rules, governments will increase their collection by about US$ 150 billion a year.
“Today’s agreement will make global taxation fairer and more efficient,” said Mathias Cormann, the OECD secretary general, in an official statement from the organization. “Now we need to be diligent in ensuring the implementation of this major reform,” he added.
The agreement was only possible after European countries such as Ireland, Estonia and Hungary, which currently charge little taxes, gave in to pressure from others, as the treaty will require the approval of the 27 members of the European Union.
Four of the 140 nations gathered in Paris for the discussions were left out: Sri Lanka, Pakistan, Nigeria and Kenya. According to the British newspaper Financial Times, China and Brazil were reluctant to sign the document and India only signed it at the last moment.
Two-year moratorium on big techs
The intention is for the new rules to take effect in 2023, but it is not certain that this will happen. One of the main doubts is the approval of the changes in the US Congress. For this reason, a kind of two-year moratorium was agreed on charging new fees on digital services, shielding companies like Apple, Facebook and Google.
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The agreed model broadly follows what was proposed by the United States, which, under the administration of President Joe Biden, gave new impetus to the negotiations. And it comes after rich countries see their revenues plummet and their demands for social spending soar because of the pandemic.
The agreement has two fronts. The first of these is the creation of the minimum global fee to be charged to companies with international operations. This prevents companies from moving their headquarters or facilities to nations that charge less tax.
It is a strong American demand, especially from the Biden government, which is preparing to increase corporate taxes within the US.
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The second part of the new taxation model is the collection of taxes where companies sell their products or services, even if they do not have a physical presence in these locations.
This was a European demand and particularly targets the American technology giants, which have grown too much in the pandemic and do not pay or pay little tax where they sell their products.
Yellen: ‘once in a generation’
US Treasury Secretary Janet Yellen said the deal “was a feat for economic diplomacy,” the kind that is “achieved only once in a generation.” And he urged the US Congress to pass it quickly.
Ahead of the deal’s release, Yellen told the press that the pact would “interrupt four decades of a race to cut corporate taxes, in which authorities offer less taxes to attract business, leading others to respond with still low rates.”
The expectation is that the text agreed upon today will be endorsed by the heads of state of the G-20, which brings together the 20 largest economies in the world, in a meeting in Rome at the end of the month.
Ireland was strongly opposed to the creation of the global tax because, since 2003, it has adopted a rate of 12.5%, lower than that practiced by its European peers. This allowed it to house the European headquarters of several tech giants, such as Apple and Google, which settled in the country to pay less taxes.
Ireland surrenders to pressure
According to the Financial Times, a small change in the final text made the Irish accept the pact. Instead of creating an “overall minimum rate of at least 15%”, the tax will be 15%. Thus, there is no margin for floors greater than this percentage, says the FT.
“I believe there is balance where we are right now. (The agreement) represents a fair compromise, reflecting the interests and contributions of many countries involved in the negotiation,” Pascal Donohoe, Ireland’s finance minister, said on Thursday when he said he would support the initiative.
Despite increased support for the agreement, concerns remain about how it will be applied and approved uniformly across the world.
India, China and Poland said the minimum tax could hurt their ability to attract investment with initiatives like research and development credits and special economic zones that offer tax breaks to investors.