The Organisation for Economic Cooperation and Development (OECD) announced on Friday that they had made a major breakthrough on corporate tax rates, after years of disagreement surrounding the issue.
As previously reported by CEO Magazine, the group of developed nations agreed to a global minimum corporate tax rate of 15%. This marks a huge shift for smaller economies within the group, which have attracted international firms — to a large extent — via lower tax rates.
“The landmark deal, agreed by 136 countries and jurisdictions representing more than 90% of global GDP, will also reallocate more than USD 125 billion of profits from around 100 of the world’s largest and most profitable MNEs to countries worldwide, ensuring that these firms pay a fair share of tax wherever they operate and generate profits,” the OECD said in a statement on Friday.
The breakthrough comes after changes were made to the original text, notably that the rate of 15% will not be increased at a later date, and that small businesses will not be hit with the new rates.
This helped the Republic of Ireland — a long-time opponent of raising corporate tax rates because of the benefits that tax breaks have for their relatively small economy — to get on board with the plan.
Hungary, another long-term skeptic about a global tax deal, also changed its mind after receiving reassurances that there will be a lengthy implementation period.
Countries now have to work out some outstanding details before the new deal begins to be implemented in 2023.
The agreement is “a once-in-a-generation accomplishment for economic diplomacy,” Treasury Secretary Janet Yellen said in a statement.
Yellen congratulated the many nations who “decided to end the race to the bottom on corporate taxation,” and expressed hope that Congress will use the reconciliation process to quickly put the deal into practice in the U.S.
“International tax policymaking is a complex issue, but the arcane language of today’s agreement belies how simple and sweeping the stakes are: When this deal is enacted, Americans will find the global economy a much easier place to land a job, earn a living, or scale a business,” Yellen’s statement said.
The deal marks a significant shift in tax policy because it not only imposes a minimum corporate tax rate in several countries, but it also forces companies to pay taxes where they operate — not just where they have their headquarters.
The exact formula for working out how much companies will owe across the various jurisdictions is one detail that still needs to be finalized.
The announcement from international leaders came about partly because of the Covid-19 pandemic, which revived public pressure for fairer taxation, given that governments are now searching for new sources of funding.
Furthermore, when elected in 2020, President Joe Biden made it clear he wanted to tax the rich more, attempting to address inequality in the U.S.