ROME – President Biden and other national leaders gathered at the G20 summit on Saturday formally approved a new global minimum tax, concluding months of negotiations on a groundbreaking tax deal.
The goal of the new global minimum tax of 15 percent is to reverse decades-long declining tax rates for corporations around the world, trend experts say governments have deprived revenues of funding for social spending programs. The agreement is a key achievement for Finance Minister Janet Yellen, who has made the international corporate tax level one of the main priorities of her mandate and has made a determined effort to act swiftly on the agreement.
The plan has already been approved by each country’s finance ministers, but its formal approval by the heads of state puts additional pressure on the difficult task of turning what remains a coveted agreement into separate legislation.
Nearly 140 countries, representing more than 90 percent of total world economic output, have backed the deal, but each needs to introduce new standards in a process that could take some time.
At a meeting in Rome on Saturday morning, each of the G-20 leaders expressed support for the global minimum tax, and Biden stressed his support for the “historic” measure, says a senior administration official, who disclosed the debate on condition of anonymity. . Some world leaders have participated virtually.
“It will ensure a level playing field around the world where companies and countries can compete based on their innovative ideas, fundamentals, workforce quality and their business environment,” Yellen told CNBC on Friday. “Countries around the world have decided to fund the public infrastructure investments they need, to invest in their people and not all the burden of raising taxes will fall on workers … this is a way to ensure that all states he can collect more in a fair way. “
The lowest tax will be linked to a broader change in global taxation aimed at preventing countries and businesses from unfairly lowering the new level. Under the pact, companies seeking to evade taxes by shifting profits to low-tax countries will face an “additional” tax that would require them to pay the difference between the tax haven’s tax rate and the 15% minimum tax rate. level in the country. the companies where they are established. Proponents of the deal are also optimistic that companies will not relocate under the agreement, partly because much of the world has committed to a new minimum and partly because treasury officials have said they will be new. ” enforcement provisions “introduce tax penalties in countries that do not want to join the agreement.
The U.S. already has a version of its own global minimum tax, created as part of the 2017 GOP tax law, which introduces a 10.5 percent minimum tax on foreign earnings of U.S. multinationals. The Biden administration initially proposed raising that amount to 21 percent as evidence of U.S. commitment to higher corporate taxes, but after negotiations with congressional Democrats, instead proposed a 15 percent rate in line with the global deal. (This 15% tax on foreign profits of American multinationals is separate from the 15% minimum tax that Biden wants to introduce for large companies in the US as well)
“There will be many opportunities to make enforcement more difficult, especially if there is more international cooperation,” Itai Grinberg, deputy assistant finance secretary, said in a blog post last month.
But the deal involves not only these changes, but a separate – and probably more controversial – overhaul of multinational taxation in profit-making in countries where they are not physically present. This related but separate tax deal is aimed primarily at venting anger in Europe over US-based tech giants who pay little tax in European countries, even though they earn significant amounts there. Several European leaders said they believed the measures were linked together.
Republicans called both parts of the plan an imaginative thinking by the administration, which sacrificed part of the U.S. tax base to European rivals largely to ensure a symbolic victory. Skeptics also note that key details in the plan, particularly regarding the part of the tax agreement that concerns the taxation of multinational technology companies, remain unresolved and that leaders could face disagreements when implementing the plan.
“Europeans have no particular interest in the global minimum tax and will reduce it in subtle ways, so it’s actually well under 15 percent,” said Douglas Holtz-Eakin, a Republican political analyst. ‘The deal was,’ We’re going to give you some more tax base, and in return you’re going to raise your taxes yourself. ‘ But I wonder if we will reach this agreement in practice. “
Other critics argue that the plan could actually penalize some of the poorest countries by shifting the tax base from the place of production to the headquarters of companies more often located in rich countries. Nigeria and other African countries, along with Pakistan and a handful of others, have rejected the agreement.
“Production takes place in developing countries,” said Joseph Stiglitz, an economist at Columbia University. “The fact that they have decided to give a tax to developed countries only shows a lack of empathy for developing countries.”
Nevertheless, Yellen was adamant that something needed to be done to prevent corporations from playing states with each other in order to step up corporate tax rates lower and lower. The average corporate income tax rate worldwide has fallen from about 40 percent in 1980 to about 23 percent in 2020, the Tax Foundation reports.
In 2017, about 40 percent of the profits earned by multinational companies in the world – or more than $ 700 billion – were stored in tax havens.
The new minimum tax rate applies only to companies with more than $ 850 million in annual revenue and is expected to collect about $ 150 billion in additional global tax revenue each year, according to the Organization for Economic Co-operation and Development, which intervened in the agreement.