VENICE, Italy – World leaders agreed on Saturday to press ahead with the most significant overhaul of the international tax system in decades, with finance ministers from the world’s 20 largest economies backing a proposal that would crack down on tax havens and enforce new taxes on large ones , profitable multinational corporations.
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If the plan goes into effect, it could reshape the world economy by changing the location of businesses, tax authorities, and the incentives nations offer to attract investment.
But key details have yet to be worked out before an October deadline for the deal to close, and opposition is mounting from companies that may soon face higher taxes, as well as from small but crucial low-tax countries like Ireland that are turning their economic models upside down posed.
US Treasury Secretary Janet Yellen said the proposal would end a race to the bottom where countries have been cutting interest rates for years to attract businesses. She said this was “a race that no one won. Instead, it has robbed us of the resources we need to invest in our people, our workforce and our infrastructure.”
The international tax proposal aims to discourage the world’s largest companies from using accounting and legal systems to shift their profits to countries where little or no tax is due – and where the company may have little or no tax doing actual business. Below the minimum, companies that evade taxes abroad would pay them domestically. This would remove incentives to use or build tax havens.
From 2000-18, US companies posted half of all foreign profits in seven low-tax countries: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore, and Switzerland.
After a weekend of negotiations, the top economic officials of the group of 20 nations agreed to move forward. They officially supported a proposal for a minimum global tax of at least 15% that every country would adopt and new rules that would oblige large global corporations, including tech giants like Amazon and Facebook, to pay taxes in countries where their goods are sold or services are sold, even if they are not physically present there.
“After many years of discussion and building on the progress made over the past year, we have reached an historic agreement on a more stable and fairer international tax architecture,” the finance ministers said in a joint statement following the meeting.
The implementation, which is expected as early as 2023, depends on measures at national level. The countries would include the minimum tax liability in their own laws. Other parts might require a formal contract.
The approach marks a reversal of years of economic policy, which used low taxes as a means for countries to attract investment and stimulate growth. Instead, countries gather to believe that they need to finance infrastructure and public goods and use more fiscal firepower to prepare for future pandemics, leading to a global hunt for revenue.
“I see this deal as a good thing for all of us because, as everyone knows, we have been participating in this self-destructive international tax competition for decades, including the United States,” said Yellen at the G20 summit. “I’m really confident that with the growing consensus that we are on our way to a tax system that is fair to all of our citizens, we really are.”
HARD ROAD AHEAD
Finance ministers ‘broad-based support on Saturday marked a critical step forward, but officials admitted the hardest part lies ahead of them in trying to reach an agreement by the G-20 leaders’ meeting -States to achieve in Rome in October.
One of the biggest hurdles is the continued reluctance of low-tax countries like Ireland, Hungary and Estonia, which have refused to sign the pact, potentially failing the kind of overhaul that Yellen and others are envisioning.
Hungary and Estonia have expressed concerns that accession to the agreement may violate European Union law. Ireland, which has a tax rate of 12.5%, fears it will turn its economic model upside down and siphon off the foreign investment that has fueled its economy.
Without the unanimous consent of the EU members, an agreement would stall. The introduction of a minimum tax would require an EU directive, and directives require the support of all 28 countries in the Union.
Ireland had previously indicated it would reject or block a directive and Hungary could prove to be an even bigger hurdle given its strained relationship with the union, which has put pressure on Hungary on independent rule of law and corruption issues.
Hungarian Prime Minister Viktor Orban has declared that taxes are a state matter and recently called a proposed global minimum corporate tax “absurd”. Hungary’s low corporate rate of 9% has helped attract large European manufacturers, particularly German automakers like Mercedes and Audi.
France’s Finance Minister Bruno Le Maire said on Saturday that it was important for all of Europe to support the proposal. The G-20 countries plan to meet with representatives from Ireland, Hungary and Estonia next week to address their concerns, he said.
“We will discuss the point next week with the three countries that still have some doubts,” he said. “I really think that the impetus from the G20 is clearly crucial and that this breakthrough should bring all European nations together.”
RATE NOT YET SET
Policymakers also have yet to determine the exact rate companies will pay as the United States and France push to climb above 15%, and negotiations continue on which companies will be subject to the tax and which will be excluded .
The framework currently exempts financial services companies and extractive industries such as oil and gas. A spinoff suggested by tax experts could open a large loophole as companies attempt to redefine themselves to meet the requirements for exemptions.
Domestic politics could also pose hurdles for countries that have agreed to convert this obligation into law, including the United States, where Republican lawmakers have signaled opposition and said the plan would harm American businesses.
Texas Rep. Kevin Brady, the top Republican on the tax committee, broke the deal and said, “This is an economic surrender to China, Europe and the world that Congress will reject.”
“The most important thing is to understand that if an agreement is to be reached, there can be no agreement that penalizes US companies,” said Neil Bradley, chief policy officer of the US Chamber of Commerce. “And of course that is very important.”
A report by the European Network for Economic and Fiscal Policy Research earlier this month found that only 78 companies are expected to be affected by the revision, but nearly two-thirds of those are American. The researchers estimated that the new taxes would bring in $ 87 billion in revenue, and that Apple, Microsoft, Alphabet, Intel, and Facebook would pay $ 28 billion of that.
“For the United States, this will be a fundamental shift in the way we do in the global economy,” Yellen said. “No competition based on the lowest tax rates, but rather on the skills of our employees, our ability to innovate and our fundamental talents.”
The US already has a minimum tax on foreign income, but President Joe Biden has proposed roughly doubling the rate to around 21%, which would more than match the proposed global minimum. American companies fear they will be disadvantaged if their foreign competitors only pay 15%.
The Biden government also plans to raise the domestic corporate tax rate from 21% to 28%. The Democrats in Congress are pushing legislation to make these changes to the tax law this year.
“If a US company tries to compete with a significantly higher tax burden globally because of this significantly higher minimum tax on its business activities, it is a competitive factor in order to be successful,” said Barbara Angus, Global Tax Policy Leader at Ernst & Jung.
Information on this article was contributed by Alan Rappeport of The New York Times and David McHugh of The Associated Press.