What is the Global Minimum Corporate Tax Deal?
The global Minimum Corporate Tax deal has been recently approved by 136 countries. It is a global deal to ensure that the big companies pay a minimum tax rate of 15 %which would, in turn, make it next to impossible for them to evade taxes. The acceptance was announced by Organization for Economic Cooperation and Development on 8th October 2021.
The OECD named the four countries that did not join the agreement. They are:
- Sri Lanka
However, the countries that have signed the agreement account for 90% of the global economy.
Global Minimum Tax: What is the need?
After the COVID 19 crisis, the budget was strained and many Governments did not want the multinationals to shift profits and tax revenues to low tax countries without regard to where their sales were made.
The income from intangible sources like software, royalties on intellectual property has migrated to these jurisdictions, which has allowed many companies to avoid paying higher taxes in their home countries.
The minimum tax bar would put an end to the decades of tax competition between the Governments of the world to attracting foreign investment.
Global Minimum Corporate Tax Deal: How would it work?
The Global Minimum Tax Rate will only apply to overseas profits of multinational firms with 750 million euros sales across the world.
It would allow the Government to set whatever tax rate they wish for. However, if any company pays lower rates in a country, the Governments there could top up their taxes to a minimum of 15% which would eliminate the advantage of shifting profits.
The second track of the overhaul would allow the countries (where the revenues were earned) to tax 25% of the largest multinationals excess profit which is defined as profit in excess of 10% of revenue.
What is the Economic Impact of the Tax Deal?
This tax deal would generate almost 150 billion dollars in additional global tax revenues. Taxing rights on more than 125 billion dollars of profit would be additionally shifted to the countries where they are earned from low tax countries and currently booked.
This deal would also encourage the multinationals to repatriate capital to their country of headquarters giving a boost to the economies.
After the agreement that took place the Finance Ministers of the Group of 20 economic powers would formally endorse the deal which would pave a way for adoption by G20 leaders at the October summit.
The agreement also calls for the countries to bring it into law in 2022 so that it can be effective by 2023. This however is an extremely tight timeframe that previous international tax deals took years to implement.