Historic Digital Age Tax Deal Struck by International Community at G20 Summit

After a decade of talks led by the Organisation for Economic Co-operation and Development (OECD) a substantial majority of the world’s nations agreed on Friday (08 October 2021) to subject multinational enterprises (MNEs) to a minimum tax rate of 15% from 2023.

Hungary, Estonia and Ireland initially disagreed with the new global tax regime but have now come to the table and also clinched the deal.

Although Ireland has over the years, attracted large amounts of foreign investment with its tax rate of 12.5%, Finance Minister Pascal Donohoe, subsequent to a compromise on the phrasing of the agreement, stated that he was “absolutely certain” Ireland’s economic objectives would be served by accepting the deal.

The 136 countries who signed onto the deal represent 90% of the global economy with only Kenya, Nigeria, Pakistan and Sri Lanka not having yet come on board.

Prior to this agreement being reached, countries would often vie with each other to offer the most alluring tax deal to MNEs. Given that these gigantic companies might establish a base and create jobs in the jurisdiction that presented the most attractive tax incentives, this process made good fiscal sense for a substantial period.

As the present digital era unfolded, MNEs became quite skilled at transferring profits from where they traded to jurisdictions that provided the lowest corporate tax rates. This was clearly good news for what are commonly known as tax havens and bad news for those countries with less competitive corporate tax rates.

The deal when activated, will entail a sweeping revamp of international tax rules. The new rules are aimed not so much at eliminating tax havens that have in the past, cut off countries from a key revenue stream but more to make certain that the world’s most sizeable corporations pay at least a portion of their taxes in their trading locations as opposed to where they are headquartered. The new global tax plan will in effect minimise the opportunities for MNEs to profit shift to jurisdictions with lower corporate tax rates. In essence, eliminating the extant ‘race to the bottom’… This ‘race’ has persisted for decades depriving nations of funds required to maintain existing and build new infrastructure and contend with global health crises such as the current covid19 pandemic.

The OECD stated that the minimum tax rate established in the new agreement would only apply to MNEs with annual earnings of more than 750 million euros. It is expected that the new tax rate will hit digital giants such as Amazon, Facebook and Google with profit margins exceeding 10%. A quarter of any profits these companies generate above the 10% threshold will be transferred to the countries where those profits were earned and taxed there. Projections to date indicate that the new tax agreement will produce approximately $150 billion in additional global tax revenue per annum.

“[This] is a far-reaching agreement which ensures our international tax system is fit for purpose in a digitalised and globalised world economy,” said OECD Secretary-General Mathias Cormann.

The OECD negotiations met with support from the big U.S. tech companies such as Google and Amazon. One of the key reasons for this support is that participating countries discussed terms on, and ultimately agreed to, eliminate separate digital services taxes in return for the authority to tax a portion of their profits under the new tax agreement.

The agreement effectively means that the hulking digital MNEs, depending on the country in question, are able to deal with only one international tax regime rather than a slew of alternate requirements.

Notwithstanding his acquiescence to the deal, Argentine economy minister Martin Guzman posited that the agreement would provide meagre assistance to developing countries. He contended that a minimum tax rate of 21% would have had greater efficacy.

With the corporate tax rate in industrialised nations averaging 23.5%, substantially above the agreed on 15%, Oxfam also claimed that the rate assented to in the deal was too low and would “let big offenders… off the hook”.

Susana Ruiz, Oxfam’s tax policy lead said: “The world is experiencing the largest increase in poverty in decades and a massive explosion in inequality, but this deal will do little or nothing to halt either. Instead, it is already being seen by some wealthy nations as an excuse to cut domestic corporate tax rates, risking a new race to the bottom.”