Nearly 140 countries on Friday agreed to the most radical overhaul of global tax rules in a century, a move that aims to reduce tax evasion by multinational corporations and generate additional tax revenues of up to $ 150 billion a year.
But the agreement, which has been in the works for a decade, must now be implemented by the signatories, a path that risks being far from smooth, including in a very divided US Congress.
The reform provides for an overall minimum corporate tax of 15%, aimed at preventing companies from operating in low-tax jurisdictions.
The agreement between 136 countries also aims to address challenges posed by companies, especially tech giants, who register intellectual property that generates their profits all over the world. As a result, many of these countries have established operations in low tax countries such as Ireland to reduce their tax bill.
The final deal won backing from Ireland, Estonia and Hungary, three members of the European Union who refused support for a preliminary deal in July. But Nigeria, Kenya, Sri Lanka and Pakistan continued to reject the deal.
The new deal, if implemented, will divide existing tax revenues in a way that favors the countries where customers are based. Larger countries, as well as low-tax jurisdictions, must implement the agreement so that it significantly reduces tax evasion.
Overall, the OECD estimates that the new rules could bring governments around the world in additional revenues of $ 150 billion a year.
The final deal is expected to receive backing from leaders of the Group of 20 major economies when they meet in Rome at the end of this month. Subsequently, the signatories will have to change their national laws and amend international treaties to put the overhaul into practice.
The signatories set 2023 as an implementation target, which tax experts said was an ambitious target. And while the deal would likely survive the failure of a small economy to pass new laws, it would be significantly weakened if a large economy – like the United States – were to fail.
“We are all counting on the ability of all the major countries to move forward together at roughly the same pace,” Irish Finance Minister Paschal Donohoe said. “If a large economy were not able to implement the agreement, it would matter to other countries. But it might not become evident for some time.”
Congress work on the deal will be divided into two phases. The first, this year, will be to change the minimum tax on foreign income for American companies that the United States approved in 2017. To comply with the deal, Democrats intend to increase the rate – the House plan calls for 16.6% – and to implement it. on a country-by-country basis. Democrats can push this forward on their own, and they’re trying to do it as part of President Biden’s broader political agenda.
The second phase will be more delicate and the timing is less certain. This is where the United States should accept the international agreement to change the rules of income taxation. Many analysts say it would require a treaty, which would require a two-thirds vote in the Senate and therefore some support from Republicans. Treasury Secretary Janet Yellen has been more circumspect about the timing and procedural details of this second phase.
–Sam Schechner in Paris contributed to this article.
Corrections and amplifications
This article was corrected at 1:07 p.m. ET to reflect the fact that Nigeria, Kenya, Sri Lanka and Pakistan continued to reject the global tax deal. The original version incorrectly said that Saint-Vincent had rejected the agreement.
This article was published by Dow Jones Newswires