It all seemed too good to be true: a global campaign to stamp out tax avoidance and harmonize international tax rules for companies that operate across national borders. At the forefront of the transparency drive is a minimum tax rate for multinational corporations, no matter where they operate. No more exploiting tax loopholes and shifting profits to countries with a low tax rate to avoid paying their fair share of taxes.
The Organization for Economic Cooperation and Development (OECD) says $240 billion (€223 billion) is lost each year through such tax avoidance. Discussions about unifying taxation of corporations have gone on for years.
In 2021, it seemed that a consensus had been reached in the OECD/G20 Inclusive Framework. Now over 140 countries from Albania to Zambia are negotiating to implement the deal.
Two pillars of global taxation
The global tax cooperation deal has two pillars: certain taxable income will be shifted, and taxed, to where it is earned, and a global minimum tax will be levied on corporations.
The latter, a global minimum tax, is a mechanism to ensure companies pay taxes without using loopholes or low-tax jurisdictions to avoid taxes.
The current model sets a 15% corporate tax rate on multinationals with revenues in excess of €750 million in at least two of the past four years. Companies that pay some tax but not 15% will have to “top up.”
Some countries have already introduced the new rules, while others are still in the process of doing so.
In Ireland, for example, the minimum tax rules came into effect on January 1, 2024. But since they only apply to businesses with €750 million turnover, over 99% of companies operating in the country will still be taxed at 12.5%, said Robert Dever, a Dublin-based partner and Irish tax practice lead at Pinsent Masons, a multinational law firm.
Paying taxes where profits are made
The other pillar of the OECD plan is proving more difficult to implement. Again, this rule applies to big multinationals. Instead of making sure companies pay taxes at all, this regulation is about where those taxes are paid. That means reallocating certain income to jurisdictions where profits are made, regardless of whether a company has a physical presence in a country or where it is headquartered.
This is meant to make the taxation fairer for companies that are unable to use tax loopholes. And it would bring tax revenue to countries — especially poorer countries — that could use the income.
To make the deal happen, countries have said they would not implement their own rules. Additionally, local digital services taxes are to be dropped, giving precedence to the global agreement. It’s an unprecedented effort in international cooperation.
The deal was supposed to be signed by June 30, but is struggling to become a reality as a number of countries rethink their participation. The biggest stalemate is in the United States.
The OECD has estimated the new rules would cover over 90% of the global corporate income tax base, including those of international social media companies.
US dysfunction causing global chaos
American participation is vital for the initiative simply because so many US-headquartered companies would be affected, said Dever. “Unfortunately, this means that the success of the deal will likely be held hostage by the political situation in Washington and a deadlock in the US Senate,” he told DW.
President Joe Biden supports the plan but doesn’t have enough votes to push it through. Biden’s predecessor and presumed Republican candidate Donald Trump, who is against such a treaty, would put a final nail in its coffin, if elected.
“The failure of the agreement is a real possibility due to US non-participation in the deal,” said Dever, who has experience advising large domestic and multinational corporations.
Another problem is that the United Nations has stepped in and offered its own plan for global tax cooperation, at the insistence of developing countries that want more say. This power struggle has diluted the OECD plan, and is pulling apart a wider consensus.
Where will the global tax debate end?
If a global agreement fails to come into force, countries will again compete against each other on taxation with their own domestic rules.
This could turn into “a form of ‘tax war,'” warned Dever. “And this would likely take the shape of unilateral digital services taxes as countries seek new revenue streams to fill the tax gap.”
There are already signs of this. Canada recently passed legislation on a digital services tax, and New Zealand and Kenya have started the process, the exact thing a global deal was meant to stop.
American Big Tech companies like Google and Facebook will be hit the hardest and “the risk of punitive trade actions by the US in response to such digital services taxes will be heightened,” said Dever.
