Global tax deal: What you need to know

Leaders from the G20 group of leading economies confirmed a long-awaited renovation a global tax system that will force some of the world’s largest companies to hand over about $ 150 billion in additional tax revenue each year.

Leaders, including US President Joe Biden and French President Emmanuel Macron, approved the proposals on the first day of their G20 summit in Rome, several officials familiar with the talks said.

The planned overhaul was the result of politically difficult negotiations overseen by the Organization for Economic Co-operation and Development (OECD).

During years of debate, Washington has threatened several European countries with a trade war after governments in Paris, Rome and London adopted their own digital taxes specifically targeted such as Google and Facebook. The European Union has faced an internal struggle as Member States such as Ireland have struggled to keep their low tax regimes away from others in the 27-nation bloc. Developing countries noted that the negotiations did not help them recover the necessary tax revenues.

Now that the G20 leaders have approved the agreement, here’s everything you need to know.

what is it about

The proposals are divided into two buckets. The so-called first pillar allows governments to tax the top 100 companies in the world above a certain threshold for their business in individual countries. To be included, companies must have at least a 10 percent profit margin and annual revenue of $ 20 billion or more. The goal is to redistribute these profits to countries where companies make money, compared to the current system that allows companies to return these funds to their domestic markets. In total, the new first pillar system, due to take effect in 2023, will distribute about $ 125 billion of existing tax revenues among more than 130 countries around the world.

Under the second component, known as the second pillar, countries will agree to a 15% global minimum corporate tax, so that multinational companies will not be able to take advantage of tax havens and other low-tax jurisdictions to avoid paying their fair value. share. This part of the agreement will involve governments around the world updating their national tax rates – changes that could be concluded by next year and generate an additional $ 150 billion in annual tax revenue worldwide.

What problem is this trying to solve?

The COVID-19 pandemic has uncomfortably highlighted how the world’s largest companies, many of them digital giants, continue to make a profit, even though the world economy has turned into the worst. Even before the global health crisis, countries such as France called for changes to the global tax regime to force Silicon Valley’s biggest names – many of whom paid little, if any, tax in the countries where their customers lived – to surrender more tax revenue to governments around the world.

The United States did not see it that way. Under former US President Donald Trump, Washington rejected OECD proposals and argued that any global tax reform for businesses should be purely voluntary. This view changed under the Biden administration, which in the spring offered a solution that included taxing the world’s 100 best countries, both digital and non-digital, as part of tax changes. This plan revived discussions and led to the expected agreement for this weekend.

Are everyone happy with the contract?

Yes and no. As in all world negotiations, officials had to make compromises along the way. Several EU countries that have adopted their domestic digital taxes have agreed to withdraw these levies – by 2023 at the latest, as soon as the general agreement is in place. The U.S. also had to allow part of the tax revenue generated from their technology giants to be shared with other countries, which some in the U.S. Congress did not do so well.

Proponents of the campaign, however, criticized the agreement to exclude developing countries, many of which will receive only marginal additional tax revenues from the current agreement. Even those in large technology companies are not too happy that their companies have been involved, while other global giants from other industries, such as financial services and mining, have been deliberately omitted from the agreement.

Is the deal across the border?

G20 leaders would like to think so, but two major obstacles remain. One is the U.S. Senate. According to the rules of the chamber, it must approve one part of the agreement by a two-thirds majority – a part that focuses on sharing the revenues of companies around the world because it touches on international treaties. Democrats currently have no votes. If U.S. lawmakers don’t approve part of the global tax deal, no one knows if it will the pact will survive.

Another likely headache involves unilateral taxes on digital services in some (mostly European) countries. These benefits will be withdrawn over time, according to a separate agreement – but only once a final global agreement is reached, including US involvement. If Washington is unable to reach both parts of the agreement through Congress, all bets are rejected on whether European governments will keep their promises to repeal their domestic taxes.

What’s next?

Negotiators have yet to finalize the details of the global pact, including how both parts of the agreement will work in practice, and recasting domestic legislation to bring it into line with the OECD-backed agreement. For the world’s lowest corporate tax rate, this is likely to happen sometime in 2022. Achieving a global corporate income sharing agreement is likely to be delayed – most likely through a new multilateral agreement – over the next two years.

World political leaders have invested years of political capital in securing an agreement, so a compromise is unlikely to be reached. However, the US and some European countries are still toying with who should be the first to blink in terms of either adopting a global tax deal in the domestic market or withdrawing unilateral digital taxes. Until an agreement is reached on this part of the broader agreement, it is still unclear whether the proposed global overhaul of tax rules will remain here.

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