DETERRING TAX AVOIDANCE BY GLOBAL COMPANIES

Negotiators from 130 countries have agreed on a major overhaul of how the world’s biggest companies are taxed in an effort to deter international avoidance schemes that have cost governments billions in revenue.

- 

It’s an attempt to better cope with a world where globalization and an increasingly digital economy mean that profits can move easily from one jurisdiction to another. The agreement was sealed in talks overseen by the Paris-based Organization for Economic Cooperation and Development, though there are still details to work out and hurdles to clear before it can take effect in 2023.

The key feature is a global minimum corporate tax of at least 15%, endorsing the broad outlines of a proposal from U.S. President Joe Biden.

While the tax deal is complex in its details, the idea behind the minimum tax is simple: if a multinational company escapes taxation abroad, it would have to pay the minimum at home.

Here’s why it was proposed and how it would work.

THE PROBLEM: TAX HAVENS AND THE ‘RACE TO THE BOTTOM’

Most countries only tax the domestic business income of their multinational companies, on the assumption that the profits of their foreign subsidiaries will be taxed where they are earned.

But in today’s economy, profits can easily slide across borders. Earnings often come from intangibles, such as brands, copyrights and patents. Those are easy to move to where taxes are lowest — and some jurisdictions have been only too willing to offer reduced or zero taxation to attract foreign investment and revenue, even if companies do no real business there.

As a result, corporate tax rates have fallen in recent years, a phenomenon dubbed a “race to the bottom” by U.S. Treasury SecretaryJanet Yellen.