This weekend, G20 leaders signed off on the most sweeping overhaul of the global tax system in a generation, agreeing to a global minimum corporate tax rate of 15% as well as teeth to prevent multinational companies from skirting it. Here’s how the whole deal will work.
What countries and companies are affected by this deal?
The deal involves more than just the G20 nations—worldwide, it’s 136 countries in total. The new 15% tax would apply to the overseas profits of multinational companies whose annual sales are at least €750 million (about $868 million). It’s worth noting that, in theory anyway, governments can still set whatever absurdly low corporate tax rate they want. The deal just makes it so companies’ home countries can now force them to pay the difference. The point is to discourage big corporations like Apple or Bristol Myers Squibb from skirting local taxes by relocating to low-rate tax havens like Ireland or the Netherlands.
What else does the deal involve, beyond a 15% tax?
To ensure big companies pay that minimum rate, the nations have also agreed to a number of other provisions.
One of these allows nations where companies earn revenue to impose extra taxes (on top of the 15% rate) on the so-called “excess profits” earned by these companies. Those businesses could be asked to pay an additional 25% tax on all profits in excess of 10% of their revenue.
Another part of the deal eliminates what are known as unilateral digital services taxes, which purport to ensure profits get taxed where economic value is created. This change would primarily affect the biggest players in the tech sphere.
What’s the economic impact?
The Organization for Economic Cooperation and Development (OECD) estimates the minimum tax will generate $150 billion in additional annual global tax revenues.
The deal also shifts who may tax the companies. Taxing profits beyond $125 billion will become the duties of the countries where they’re earned, not the tax havens where they’re currently booked. This is expected to encourage global corporations to rethink the value of being based in these countries, perhaps convincing some of them to return capital to their home countries, boosting the local economies.
The Biden administration contends the deal will make U.S. companies more competitive globally, but also cut the incentives for them to move jobs abroad.
Okay, so what happens next?
The deal this past weekend ironed out the technical details. Reaching this agreement—which finance ministers from G20 countries have been hashing out since this summer—was in many ways the easiest part. Now comes enacting it. One place where that could be a challenge is in America. Despite the Biden administration’s key role in negotiating the deal, getting the U.S. to comply could be a battle on Capitol Hill. The changes can likely to pushed through in Biden’s Build Back Better bill, but some of the deal’s specifics could also require adjusting various international tax treaties, and making those changes would likely need the support of at least some Republicans, a group that has fought nearly every single one of the administration’s other tax changes.
The agreement sets a timetable of the minimum tax taking effect by 2023. Critics argue this would be a very tight turnaround, considering previous global tax deals have taken years longer to implement.