International corporations face potentially higher tax rates as the OECD agreed a new minimum 15 per cent rate from 2023.
The OECD aims to ensure that large businesses pay tax where they operate and generate profits. Today, many use loopholes to earn profits in one country, but pay tax in countries with lower rates.
In fact, the organisation reckons the deal will reallocate more than $125 billion of tax revenues from about 100 of the world’s biggest businesses. 136 countries (out of 140) signed the deal.
“Today’s agreement will make our international tax arrangements fairer and work better,” said OECD Secretary-General Mathias Cormann. “It is a far-reaching agreement which ensures our international tax system is fit for purpose in a digitalised and globalised world economy.”
The deal includes two so-called pillars. Under Pillar One, global businesses with annual sales over $20 billion and profits over 10% of turnover must pay more tax in the countries where those profits are made. The OECD says that is likely to see tax revenues shift more to developing economies than to advanced ones.
In addition, Pillar Two introduces a new minimum corporate tax rate of 15 per cent. That catches businesses with profits over €750 million. And it will raise about $150 billion extra tax a year globally.
But the agreement was hard won. Ireland opposed higher tax rates, for example, as its own corporate tax rate has been 12.5 per cent for years. The US was also reluctant to participate if the deal unfairly taxed large digital-first businesses, such as Google and Facebook.
Crucially for the US, the deal bans countries from imposing any digital services taxes for two years from 8 October 2021. According to the FT, that olive branch may give the US government a better chance of ratifying the deal.