At the G20 Summit in Rome on October 30, leaders of the world’s foremost economic powers agreed on a global corporate minimum tax rate of 15 percent, potentially making it more challenging for large corporations to collect tax benefits by relocating abroad, The Associated Press reports.
Importantly, only multinational firms with overseas profits of more than 750 million euros ($868 million) will be subject to the new tax rate. This includes giant companies such as Google, Apple, Facebook, Amazon, and Microsoft, Al Jazeera notes.
Experts say the decades-long trend of decreasing corporate tax rates, in addition to international relocation to tax-friendly countries by companies, has made it more difficult for governments to allocate resources towards social spending programs, The Washington Post reports.
In total, approximately 140 countries representing 90 percent of the global economy have signed on to the agreement. However, each country must internally ratify the new standards, which are likely to face some political opposition. Despite not all countries signing onto the deal, supporters of the new tax rate are optimistic that enough countries have joined the agreement to incentivize corporations to return operations to their home countries.
According to the Organization for Economic Co-operation and Development, the 15 percent rate is projected to raise an additional $150 billion in global tax revenue, Reuters reports. The organization also claims that taxing rights on additional profit will be redistributed from low-tax countries—where businesses are currently located—to the countries where the tax was earned.
The agreeing countries are expected to bring the minimum tax into law by 2022, allowing the full effect of the minimum tax rate to be felt by 2023. However, this timeframe is extremely short, given that previous attempts at implementing such a global tax have taken much longer. Additionally, the deal includes a “top-up” tax, The Washington Post continues. This means that for governments that decide to set a local minimum tax rate of less than 15 percent, corporations will be required to pay the difference between the tax haven country’s rate and the 15 percent minimum tax rate of the companies where they are headquartered to that country.
Another feature of the agreement allows countries in which revenues are earned to tax 25 percent of the ‘excess profit’ of the largest multinational corporations, which is defined as profit in excess of 10 percent in revenue, the Associated Press adds.
Economists say the new global minimum corporate tax will incentivize businesses to relocate to their home country. The agreement fits in line with U.S. President Joe Biden’s “Build Back Better” economic agenda, which aims to boost the American economy through government investment in areas such as climate change, childcare, and return more power to American workers. Despite the deal falling short of Biden’s initial proposal of a 21 percent rate, according to The New York Times, he remained positive about the outcome. U.S. Secretary of the Treasury Janet Yellen also voiced her optimism for the deal, stating, “Today, every G20 head of state endorsed an historic agreement on new international tax rules, including a global minimum tax that will end the damaging race to the bottom on corporate taxation.”
In a tweet, Biden wrote, “Here at the G20, leaders representing 80% of the world’s GDP—allies and competitors alike—made clear their support for a strong global minimum tax. This is more than just a tax deal—it’s diplomacy reshaping our global economy and delivering for our people.”