Paris, France: Some 130 countries reached a historic deal Thursday that would see massive multinational firms pay their fair share of taxes.
But the deal won’t be finalised until October, with some tough work ahead to bring in recalcitrant countries.
How was the deal reached?
In order to get on board the developed countries who have seen their tax revenue leak away, as well as sceptical emerging nations and countries which have benefited from ultra-low tax rates, a number of compromises were necessary.
While the deal foresees an effective minimum 15 percent tax rate — that is to say that the amount actually levied and paid — there will still be a few loopholes to reduce that.
Countries will still be able to offer incentives to encourage companies to set up production facilities. Developing nations will still be able to benefit from breaks foreseen in bilateral treaties.
And the text’s provisions concerning a redistribution of profits to countries where companies do most of their business will only apply to the top hundred or so multinationals.
But to assuage developing countries it was agreed that after seven years the number of companies subject to this provision will grow.
That means developing countries will likely see more revenue heading their way and that helped bring India, Turkey and Argentina on board.
The measures are considered insufficient, however, by the anti-poverty NGO Oxfam, which believes the deal is still skewed towards rich nations.
But one of the key negotiators behind the deal, the head of tax policy at the OECD, Pascal Saint-Amans, said “the agreement is very good for developing countries, it has major advances for them.”
The next step will be a meeting of G20 nations on July 9 and 10.
While the OECD-brokered deal of 130 countries takes out some of the drama, as all of the G20 nations are on board, the meeting can help maintain political momentum.
Not only do the nations have plenty of technical details to work out before the self-imposed October deadline (with a hoped-for 2023 start date), they still want to bring hold-outs on board.
Another potential obstacle is the US Congress, where Republicans are opposed to the deal and could sink it in the Senate.
Who are the holdouts?
Of the 139 nations that participated in the talks, nine didn’t sign up to the deal: Ireland, Hungary, Estonia, Peru, Nigeria, Kenya, Sri Lanka, Barbados and Saint Vincent and the Grenadines.
Except for Peru, which abstained due to a domestic political crisis, the other nations use low tax rates to attract multinationals.
Nigeria and Kenya believed the guarantees offered to developing countries were insufficient, according to a source involved in the negotiations.
Ireland said it supported the measure to redistribute taxes paid by multinationals among nations where they do business, but opposed the minimum 15 percent effective tax rate.
Hungary said the 15 percent tax rate is far too high and would weigh on economic activity.
France, which takes over the rotating EU presidency in January, hopes to get the two nations plus Estonia on board so the bloc can adopt a minimum tax provision.
What points are outstanding?
Even if the OECD deal was much more detailed than hoped, there are plenty of issues to work out.
One of the most contentious may be the exact tax rate: the text of the agreement currently reads “at least 15 percent”, but many states don’t want anything higher.
The calculation of the amount of taxes that can be redistributed also needs to be detailed.
As do some points concerning exemptions from the minimum tax rate.