Most of the world’s countries signed a historic agreement on Friday that will make large companies pay more taxes.
A total of 136 countries agreed on a global minimum tax of 15%, as well as a fairer system of taxing profits where they are earned.
This measure arises from the concern that multinational companies redirect their profits to places where taxes are lower, in order to reduce the tax burden to pay.
Some, however, say the deal doesn’t go far enough.
The OECD (Organization for Economic Cooperation and Development) has led the talks to reach this agreement for a decade.
It is estimated that it can generate an extra $ 150$ 1,000 million in taxes per year, which will help economies recover after the coronavirus pandemic.
Tax competition between countries will not be eliminated, it is only limited.
The global minimum tax on multinationals will start in 2023. There are countries that will reallocate some tax rights for large multinational companies from their home countries to the markets where they operate and earn profits.
And regardless of whether the firms have a physical presence there, something that is expected to have an impact on large digital companies such as Amazon and Facebook.
The OECD said it will affect $ 125 billion in profits for about a hundred of the world’s largest and most profitable multinationals.
“It is a wide-ranging agreement that ensures that our international tax system adjusts to a digitized and globalized world economy,” said the OECD Secretary General, Mathias cormann.
More than 100 countries supported the initial OECD proposals when they were announced in July.
Ireland, Hungary and EstoniaCountries with taxes on multinationals below 15% initially resisted, but ended up joining the agreement.
However, Kenya, Nigeria, Pakistan and Sri Lanka have yet to join the agreement.
The pact also resolves the dispute between the United States and countries such as France and the United Kingdom, which had threatened a digital tax for large American technology companies.
“Virtually the entire world economy has decided to end the race to the bottom on corporate taxes,” celebrated Janet Yellen, Secretary of the Treasury of the United States, one of the countries behind the minimum tax.
“Instead of competing to offer low taxes, the United States will compete with the skills of our workers and our ability to innovate, a race that we can win,” he added.
Why change the rules
Governments have long faced the challenge of taxing multinational companies operating in many countries.
That challenge was on the rise with the rise of big tech corporations like Amazon and Facebook.
Until now, companies can set up branches in countries with relatively low corporate tax rates and report their profits there.
That means they only pay the local tax rate, even if the profits come primarily from sales made elsewhere. This is legal and is commonly done.
This Friday’s agreement aims to prevent this from happening, mainly in two ways.
First, the global minimum tax rate limits the “race to the bottom,” in which countries can compete with each other with low tax rates.
Second, the rules will aim to make companies pay taxes in the countries where they sell their products or services, rather than where they report their profits.
Winners and losers
Analysis by Theo Leggett, BBC Business Correspondent
This agreement is a big change when it comes to taxing large global companies.
In the past, countries competed to offer an attractive deal to multinationals. That made sense when those companies came into the country, built a factory, and created jobs. You could tell they were giving something in return.
But the giants of the new digital age simply moved profits from one place to another, from the regions where they did their business to those where they paid the least taxes. Good news for tax havens and bad news for everyone else.
The new system minimizes the opportunities to make those changes and ensures that large companies will at least pay part of their taxes where they operate rather than where they choose to be headquartered.
That 136 countries have signed it is an achievement in itself. But inevitably there will be losers and winners.
Because it is important?
Those who promote the minimum tax point out that it is a way of homogenizing the international tax system, preventing corporations from changing their operations from one country to another in search of greater advantages.
At a time of economic crisis associated with the covid-19 pandemic, a tax system with fewer benefits for multinationals will allow governments to increase their tax collection.
Increasingly, tax revenues come from intangible sources such as patents for medicines, software and other digital services that have migrated to tax havens.
That is why many governments demand the creation of a tax framework that responds to the new systems of production, marketing and payment of taxes that for decades were no longer constrained by national regulations.
But not everyone agrees with the global regulation of the taxes paid by multinationals.
Chris Edwards, director of Tax Policy Studies at the Cato Institute in the United States, argues that in the same way that competition between companies promotes efficiency, tax competition generates benefits that favor efficiency between countries.
“Tax competition between countries is a good thing, it is not a bad thing,” Edwards said in a dialogue with BBC Mundo a few months ago.
Without international competition, he added, governments become monopolies.
The question remains as to what strategies tax havens will now apply for this new scenario.
“There are always incentives for governments to cheat” and end up playing by their own rules, explained Michael Moore, professor of economics and international affairs at George Washington University.
As he pointed out, even if governments agree to a minimum rate, they can create other incentives to attract companies, such as exemptions, subsidies, credits or any mechanism that ultimately favors firms.
“They can create secondary policies that ultimately change the effective rate that companies pay,” Moore said.
Oxfam, an international confederation of NGOs to combat poverty, says 15% is too low a floor “that will do little or nothing to end harmful tax competition.”
In July, its international executive director, Gabriela bucher, said: “It is already being seen by countries such as Australia and Denmark as an excuse to reduce local taxes on corporations, which can cause a new race to the bottom.”
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