OECD tax deal set to hike receipts from digital giants and corporations

By on 07/07/2021
US Treasury secretary Janet Yellen and Mathias Cormann, OECD secretary-general, meet in June this year. Credit: HM Treasury/Flickr

Some 131 OECD member countries have agreed a landmark deal to reform international taxation, which includes setting a minimum global corporation tax.

The agreement, which was signed last week, aims to update the “century-old international tax system, which is no longer fit for purpose in a globalised and digitalised 21st century economy”, according to the OECD.

The agreement rests on two “pillars”. The first strand governs taxing rights and aims to calculate large multinational enterprises’ liabilities based on where they conduct business and earn profits, not just where they have a physical presence. The second pillar “seeks to put a floor on competition over corporate income tax” by setting a global minimum corporate tax rate.

“After years of intense work and negotiations, this historic package will ensure that large multinational companies pay their fair share of tax everywhere,” OECD secretary-general Mathias Cormann said. “This package does not eliminate tax competition, as it should not, but it does set multilaterally agreed limitations on it.”

Janet Yellen, secretary of the US Treasury, called it a “historic day for economic diplomacy”.

“Lower tax rates have not only failed to attract new businesses, they have also deprived countries of funding for important investments like infrastructure, education, and efforts to combat the pandemic,” she said. “In the United States, this agreement will ensure that corporations shoulder a fair share of that burden.”

Two pillars

The agreement’s first pillar will initially cover multinational companies that have a global turnover of over €20bn (US$23.6bn) and profitability above 10%.

Under the rules, a jurisdiction will get some taxing rights when a multinational earns at least €1m (US$1.2m) revenue from their area. For smaller jurisdictions with a GDP under €40bn (US$47,2bn), the threshold for taxation drops to €250,000 (US$295,000).

The OECD said it will develop “detailed” rules to govern the sourcing of revenue to a particular jurisdiction, based on goods or services being used or consumed there.

This pillar is expected to reallocate taxing rights on more than US$100 billion each year, according to the OECD.

Pillar two, meanwhile, sets a global minimum corporate tax rate of at least 15%. OECD estimates suggest this will generate about US$150bn in revenues every year. “Additional benefits will also arise from the stabilisation of the international tax system and the increased tax certainty for taxpayers and tax administrations,” the OECD noted.

Global debate

While the deal is a landmark moment for international tax co-operation, some critics argue it needs to go further.

Writing in Project Syndicate, Jose Antonio Ocampo, a former finance minister of Colombia, and Tommaso Faccio, a lecturer and head of the Secretariat of the Independent Commission for the Reform of International Corporate Taxation, argued that a tougher deal is needed.

The minimum rate of 15%, they wrote, is too low, and “reflects several developed countries’ preference to protect their own global firms rather than follow the lead of the United States and Argentina, which had called for a minimum tax rate of 21%, and of many African countries, which proposed a 20% rate.”

Furthermore, some low-tax economies like Ireland and Barbados held out on the agreement. An anonymous Irish official told Politico that “Ireland cannot sign on to generalised language that does not include cast-iron assurances on specific issues and policies that matter to us.”

And in some countries, domestic politics could scupper the international agreement. US President Joe Biden, for example, is a supporter of the deal, but could face opposition from Senate Republicans at home.

The OECD set a deadline of October 2021 for finalising some technical work and developing a plan for implementation in 2023.

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