What does this deal mean for big companies & how is it connected to the Pandora Papers investigation?
What Happened?
Last week, nearly 140 countries agreed on a tentative deal. Under this agreement, countries would enact a global minimum corporate tax of 15% on the biggest, internationally active companies. The agreement was announced by the Paris-based Organisation for Economic Co-operation and Development (OECD), which hosted the talks that led to the agreement.
US Treasury Secretary Janet Yellen said, as mentioned by Al Jazeera, “Today’s agreement represents a once-in-a-generation accomplishment for economic diplomacy.” The agreement is likely to have an impact on big tech companies that have largely chosen low-tax jurisdictions to headquarter their operations.
Why Do We Need This Deal?
In 2018, American multinational companies reported making $97 billion in Bermuda. This is a huge amount, considering how Bermuda’s GDP that year was only $7.2 billion. How can a company make tens of billions of dollars in a country and not add any value to the country itself? Because these companies choose those nations that have low taxes like Bermuda, Ireland, Hungary, and Estonia.
After the COVID-19 pandemic ravaged several countries, the budget was strained, and many governments did not want the multinationals to shift profits and tax revenues to low tax countries without regard to where their sales were made. This is why most of the countries, except Kenya, Nigeria, Pakistan, and Sri Lanka, signed on the tax deal. The minimum tax bar would put an end to the decades of tax competition between the governments of the world to attracting foreign investment.
More About The Deal
The deal will cover companies with global sales above 20 million Euros ($23 billion) and profit margins above 10%. The 15% corporate tax will come in from 2023, provided all countries move such legislation. Governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home government could increase their taxes to the 15% minimum, eliminating the advantage of shifting profits.
The decisions effectively ratify the OECD’s two-pillar package that aims to make sure that large multinational enterprises (MNEs) “pay tax where they operate and earn profits.”
· Pillar One aims to make sure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs, including digital companies. This would encompass reallocation of some taxing rights over MNEs from their home countries to markets where they have business and earn profits, regardless of whether companies have a physical presence there.
· Pillar Two looks to put a floor on competition over corporate income tax, via a global minimum corporate tax rate that countries can use to protect their tax bases.
The Impact
Sumit Singhania, Partner, Deloitte India told The Indian Express, the two-pillar solution will result in “a redistribution of $125 billion taxable profits annually” and make sure MNEs pay minimum 15% tax once this is implemented. The OECD projects the minimum tax will generate $150 billion in additional global tax revenues annually. Economists anticipate that the deal will encourage multinationals to repatriate capital to their country of headquarters, providing a boost to those economies, writes The Indian Express.
Recently, the Pandora Papers investigation showed how the rich and powerful used tax havens to avoid paying tax. So, the global minimum tax deal will bring more transparency to the global finance system, and, make the wealthy and powerful pay what they owe to the governments. Hence, this global minimum tax deal is expected to put an end to tax havens.
Zooming Out
A global minimum tax would be welcomed by multinational companies, because it is better than a patchwork of disparate taxing rules across countries. Tech companies might also appreciate the elimination of several country-level digital service tax levels. We have to wait and see how the implementation of the global minimum tax rate helps the global economy and whether it actually ends tax havens in the future.
