Paris, Italy: Some 131 nations have agreed to what would be the biggest international tax reform in a generation to clamp down on big companies that are gaming the rules.
The G20 nations are now expected to endorse a provisional deal reached under the auspices of the OECD, adding momentum to reach a final deal by October and convince hold-outs to join.
The proposed reform is comprised of two pillars to prevent companies from establishing bases in countries with low taxes to maximize profits earned elsewhere.
Pillar one would give countries a share of the taxes on profits earned there, though the tax would still be collected where the company has its fiscal base.
Multinationals operate in many countries — oil giant BP is present in 85, for example — but usually pay taxes on profits only in their tax home.
This provision would initially apply only to the top 100 or so companies, before expanding after seven years.
Pillar two is a global minimum corporate tax rate to stop competition between countries over who can offer companies the lowest rate — what critics call a “race to the bottom”.
The OECD deal set a minimum rate of 15 percent.
While this is supposed to be an “effective tax rate” — that is the companies actually pay that amount of tax — the OECD deal envisages the possibility of countries retaining some investment incentives that would reduce payments.
The next step towards a final deal is the meeting of G20 finance ministers in Venice on Friday and Saturday.
While the OECD-brokered deal removes much of the drama, as all of the G20 nations were part of the 131 nations that backed it, the meeting can help maintain political momentum towards achieving a final deal.
There are many technical details to work out before the self-imposed October deadline (with a hoped-for 2023 start date), including the method used to calculate the amount of taxes to be redistributed.
Details of exemptions from the minimum tax rate also remain to be hammered out.
Who are the hold-outs?
Of the 139 nations that participated in the talks, eight didn’t sign up for the deal: Barbados, Estonia, Ireland, Hungary, Kenya, Nigeria, Saint Vincent, and the Grenadines, and Sri Lanka.
Peru, which did not initially sign because of a domestic political crisis, later joined the agreement.
The eight hold-outs use low tax rates to attract multinationals.
Kenya and Nigeria believed the guarantees offered to develop countries are insufficient, according to a source involved in the negotiations.
Ireland said it supports the measure to redistribute taxes paid by multinationals among nations where they do business but opposes the minimum 15 percent effective tax rate.
Hungary said the 15 percent rate is far too high and would weigh on economic activity.
The US signed up to the deal, but the administration of President Joe Biden faces headwinds as many Republicans oppose the deal and could block its passage in the Senate.