The international community is moving towards sweeping changes to how big multinational companies are taxed to prevent them from stashing profits in offshore havens where they pay little or no tax after 140 countries have agreed to sign the deal.
Under the agreement, countries would enact a global minimum corporate tax of 15 per cent on the biggest internationally active companies.
US President Joe Biden has been one of the driving forces behind the agreement as governments around the world seek to boost revenue following the Covid-19 pandemic.
This agreement represents a once-in-a-generation accomplishment for economic diplomacy.US Treasury secretary Janet Yellen
The agreement was announced by the Paris-based Organisation for Co-operation and Economic Development, which hosted the talks that led to it.
The deal is an attempt to address the way globalisation and digitalisation have changed the world economy.
It would allow countries to tax part of the earnings of companies whose activities, such as online retailing or web advertising, do not involve a physical presence.
On Thursday, Ireland announced it would join the agreement, ditching the low-tax policy that has led companies like Google and Facebook to base their European operations there.
Response from Facebook
Nick Clegg, Facebook’s vice president for global affairs, said today the social media giant welcomes the corporate tax agreement, even if it means the company will have to pay more tax.
“We are pleased to see an emerging international consensus,” Clegg said in a statement sent to City A.M. this afternoon.
Clegg, a former Lib Dem MP and deputy prime minister in David Cameron’s coalition government, added that “Facebook has long called for reform of the global tax rules, and we recognise this could mean paying more tax, and in different places.”
He said that “the tax system needs to command public confidence, while giving certainty and stability to businesses.”
Although the Irish agreement was a step forward for the deal, developing countries have raised objections, and Nigeria, Kenya, Pakistan and Sri Lanka have indicated they will not sign up.
Anti-poverty and tax fairness advocates say the bulk of new revenue would go to wealthier countries and offer less to developing countries that are more dependent on corporate taxes.
The G24 group of developing countries said that without a bigger share of revenue from reallocated profits, the deal would be “suboptimal” and “not sustainable even in the short run”.
The deal must clear several more hurdles. It will be taken up by the G20 leaders at a summit in Rome on October 30-31, then the part of the deal that reallocates the right to tax corporate profits to where goods and services are consumed would ask countries to sign up to a diplomatic agreement.
The global minimum, on the other hand, could simply be enacted by countries in co-ordinated unilateral action. A top-up provision would mean tax avoided overseas would have to be paid at home.
As long as at least the major headquarters countries implement the minimum tax, the deal would have most of its desired effect.
US approval of related tax legislation proposed by Mr Biden will be key, especially since the country is home to many of the biggest multinationals. A rejection by Congress would cast uncertainty over the entire project.