Fernway DiarySM

Oct 14, 2021

The leaders of 136 countries have agreed to a two-pillar framework to reform the global tax system and crack down on tax havens that have drained countries of necessary tax revenues.

Minimum Global Tax Rate

The agreement brokered by the Organisation for Economic Co-operation and Development (OECD) and spearheaded by U.S. Treasury Secretary Janet Yellen would set a minimum tax rate of 15{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f}. The tax rate would apply to companies with annual global sales of more than 750 million euros (roughly $868 million).

Governments could still set a lower corporate tax rate, but if a company pays a lower rate in a particular country, its home government could “top up” their taxes to the 15{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} minimum. This would eliminate the advantage of shifting profits to the lowest tax jurisdictions.

The OECD projects the minimum corporate tax rate could raise $150 billion in additional global tax revenues each year.

Changing Where Large Companies Pay Taxes

Currently, profits are largely taxed where businesses have a physical presence. The agreement will tax technology companies like Amazon, Facebook, and other big global businesses in countries where they sell their goods and services, regardless of whether they have a physical presence. This change will likely make the world’s largest corporations pay more taxes and spread revenue across countries where large businesses earn sales.

This allocation of tax rights will apply to companies with revenues of more than 20 billion euros and a profit margin above 10{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f}. After seven years, the 20 billion threshold could fall to 10 billion.

Oil, gas, other mining companies, and financial services companies would be excluded from the policy.

Next Steps

The tax agreement now goes for formal approval to the Group of 20 leaders in Rome at the end of October. The OECD’s goal is to have the agreement fully activated by 2023 because it will take time for countries to update their tax laws and international tax treaties.

The legislation faces a particularly fraught battle in the U.S., where it must be passed by a divided Congress. To comply with the new requirements, Congress will have to pass legislation raising the tax that U.S. companies pay on foreign profits to 15{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} (or higher) up from 10.5{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f}.

Other critical details will also need to be worked out. For example, countries with an existing “digital services tax” will need to roll back that tax. Participating countries will also need to decide how the new taxes on large companies will be divided amongst them.

Four countries — Kenya, Nigeria, Pakistan, and Sri Lanka — did not join the agreement, but countries backing the agreement account for over 90{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} of the global economy. Economists predict that the deal will encourage multinationals to repatriate capital to their country of headquarters, supplying an economic boost to those economies.

For more information, please contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com.

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