OECD says deal reached on global minimum corporate tax rate

Global accord ensures big companies pay 15% minimum tax rate

US Secretary of State Antony Blinken speaks during a press briefing with Mathias Cormann, Secretary General of the Organisation for Economic Co-operation and Development. Photo: AP

A global deal to ensure big companies pay a minimum tax rate of 15 per cent from 2023 has been agreed by 136 nations, marking a major reform of the international tax system that makes it tougher for multinationals to avoid taxation, the Organisation for Economic Co-operation and Development said on Friday.

The deal was finally agreed after four years of negotiations when Estonia, Hungary and Ireland joined the agreement, which is now supported by all OECD and G20 countries, the Paris-based organisation said. Kenya, Nigeria, Pakistan and Sri Lanka have not joined the deal.

Under the global accord, countries will collect around $150 billion in new tax revenue annually, while $125bn in multinationals' profits will be re-allocated to the countries in which they operate, the OECD said.

"Today's agreement will make our international tax arrangements fairer and work better," Mathias Cormann, OECD's secretary general, said. "This is a major victory for effective and balanced multilateralism. It is a far-reaching agreement which ensures our international tax system is fit for purpose in a digitalised and globalised world economy. We must now work swiftly and diligently to ensure the effective implementation of this major reform."

The deal sets a tax minimum for countries that are seeking to attract investments and jobs by offering multinationals low taxes. The tax floor also makes it harder for multinationals, especially US tech giants, to avoid taxation. The new minimum tax rate will apply to companies with revenue above €750 million ($868m).

The OECD said the deal will ensure a fairer distribution of profits and taxing rights among countries for the largest and most profitable multinationals. It will re-allocate some taxing rights over large corporations from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there.

Specifically, multinationals with global sales above 20bn euros and profitability above 10 per cent - that can be considered as the winners of globalisation - will be covered by the new rules, with 25 per cent of profit above the 10 per cent threshold to be reallocated to market jurisdictions.

US President Joe Biden has been one of the driving forces behind the agreement as governments around the world seek to boost revenue following the Covid-19 pandemic.

“Today’s agreement represents a once-in-a-generation accomplishment for economic diplomacy,” US Treasury Secretary Janet Yellen said.

She said it would end a “race to the bottom” in which countries outbid each other with lower tax rates.

The deal faces several hurdles before it can take effect and will need to be cleared by politicians in Washington. A rejection by Congress would cast uncertainty over the entire project.

British Finance Minister Rishi Sunak hailed the agreement, saying there was now "a clear path to a fairer tax system".

"I am proud that the UK has taken a leading role in the world’s efforts to upgrade the global tax system for the modern age – a key priority of our G7 presidency," Mr Sunak said.

"We now have a clear path to a fairer tax system, where large global players pay their fair share wherever they do business."

France's Finance Minister Bruno Le Maire said the deal "opens the path to a true fiscal revolution."

The deal aims to prevent big groups from booking profits in low-tax countries like Ireland regardless of where their clients are, an issue that has become ever more pressing with the rise of tech giants that easily do business across borders.

On Thursday, Ireland indicated its willingness to lift its corporation tax rate to from 12.5 per cent to 15 per cent, thereby shifting the country’s status as a haven for global companies.

The estimated loss to the country from revenue is about €2bn a year.

However, the deal has also been criticised, with Oxfam calling it "a mockery of fairness".

"Today's tax deal was meant to end tax havens for good. Instead it was written by them," Susana Ruiz, Oxfam's tax policy lead, said in a statement on Friday.

The deal will rob pandemic-ravaged developing countries of badly needed revenue for health, education and better jobs, she said.

"The tax devil is in the details, including a complex web of exemptions," Ms Ruiz said. "At the last minute a colossal 10-year grace period was slapped onto the global corporate tax of 15 per cent, and additional loopholes leave it with practically no teeth."