How a global deal slows down the use of tax havens by businesses

More than 130 countries have reached agreement on sweeping changes in the way large global corporations are taxed.

The goal: to deter multinational companies from hiding their profits in countries where they pay little or no tax, better known as tax havens.

The comprehensive agreement was reached Friday between 136 countries after talks overseen by the Organization for Economic Co-operation and Development. It would update a century of international tax rules to cope with the changes brought about by digitization and globalization.

The most important feature: a global minimum tax of at least 15%, a key initiative pushed by US President Joe Biden and Treasury Secretary Janet Yellen.

Yellen said the minimum tax would end a decades-long “race to the bottom” that has seen corporate tax rates fall as tax havens seek to attract companies that profit from low rates – but do little real business in these places.

Here is an overview of the main aspects of the agreement:

WHAT PROBLEM DOES IT ANSWER?
In today’s economy, multinationals are increasingly likely to profit from intangible assets such as brands and intellectual property. These can be easy to move, and global companies can direct the profits they generate to a subsidiary in a country with very low tax rates.

Some countries compete for income by using the lowest tax rates to attract businesses, attracting huge tax bases that generate significant income even when tax rates slightly above zero are applied.

Between 1985 and 2018, the overall average rate for businesses rose from 49% to 24%. In 2016, more than half of all U.S. corporate profits went to seven tax havens: Bermuda, Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland. It costs the US Treasury $ 100 billion a year according to one estimate.

HOW WOULD A GLOBAL TAX MINIMUM WORK?
The basic idea is simple: countries would legislate a minimum global corporate tax rate of at least 15% for very large companies, those with annual turnover exceeding 750 billion euros (864 billion euros). of dollars).

Then, if companies have untaxed or lightly taxed profits in one of the world’s tax havens, their home country would impose an additional tax that would raise the rate to 15%.

This would make it unnecessary for a business to use tax havens, since the taxes avoided in the paradise would be collected at home. For the same reason, this means that the minimum rate would still come into effect even if individual tax havens do not participate.

HOW WILL THE TAX PLAN ADDRESS THE DIGITAL ECONOMY?
The plan would also allow countries to tax a portion of the income of some 100 largest multinationals when they do business in places where they have no physical presence. It could be through internet retailing or advertising. The tax would only apply to a portion of the profits exceeding a profit margin of 10%.

In return, other countries would abolish their unilateral taxes on digital services on US tech giants such as Google GOOG,
+ 0.63%

GOOGL,
+ 0.40%,
Facebook FB,
+ 0.25%
and Amazon AMZN,
-0.42%.
This would avoid trade disputes with Washington, which argues that these taxes unfairly target U.S. businesses and has threatened to strike back with new tariffs.

DOES EVERYBODY LOVE BUSINESS?
Some developing countries and advocacy groups like Oxfam and the UK-based Tax Justice Network believe the 15% rate is too low and leaves far too much potential tax revenue on the table. And while the global minimum would generate some $ 150 billion in new revenue for governments, most of it would go to rich countries, because that’s where many of the biggest multinationals are located.

A minimum of 20-30% was recommended by the UN High Level Panel on International Financial Accountability, Transparency and Integrity. In a report released earlier this year, the panel said that a rate that is too low may cause countries to lower their rates to stay competitive.

The countries that participated in the talks but did not sign the agreement were Kenya, Nigeria, Pakistan and Sri Lanka.

WHAT IS THE ROLE OF THE UNITED STATES IN THE AGREEMENT?
Biden’s tax agenda is stuck in negotiations between Democratic lawmakers as the extent of his spending and proposed rate hikes are still under debate. But the administration has claimed a demand, saying it must extend the U.S. global minimum tax in order to convince other nations to do so.

Biden has withdrawn somewhat from his initial proposals as Congress has made its contribution. The latest plan from the House Ways and Means Committee would raise the global minimum tax to around 16.5%, from 10.5%. The president initially wanted 21% as the US global minimum rate. The income of national companies would be taxed at 26.5%, compared to 21% currently.

The participation of the United States in the minimum tax agreement is crucial, simply because so many multinationals are headquartered there. The complete rejection of Biden’s overall minimum proposal would seriously undermine the international agreement.

Manal Corwin, tax director at professional services firm KPMG and a former Treasury Department official in the Obama administration, said removing unilateral digital taxes, or DSTs, would provide “a very strong incentive” for state involvement. -United. Indeed, the deal would avoid a destructive trade dispute that could spread to independent companies in other sectors of the economy.

“When you get into back-and-forth threats of tariffs, tariffs are not necessarily imposed on companies that are in the crosshairs of the issue under debate,” she said. “Maybe it will be DST today and tomorrow it will be another unilateral step.” She said international taxation needs stability and consensus “to encourage investment and growth…. (L) the unraveling of the global consensus, if it starts with DST, can spread to other things.

HOW WILL THE AGREEMENT TAKE EFFECT?
The deal will go to the leaders of the Group of 20. A deal is likely as the 20 members signed the deal on Friday. Implementation then passes to individual countries.

Income tax when companies do not have a physical presence would require countries to sign an intergovernmental agreement in the year 2022, with implementation in 2023.

The overall minimum could be applied by each country using model rules developed by the OECD. If the United States and European countries where most multinationals are headquartered legislate such minimums, it would have the desired effect.


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