Global Tax Agreement Near You. Here’s How It’ll Work.


WASHINGTON — When leaders of the 20-nation Group meet in Rome this weekend, they prepare to sign off on the most comprehensive overhaul of the international tax system in a century, launching a global minimum tax of 15 percent and changes in how governments can enforce it. taxes on large, profitable multinational companies.

The agreement is the result of years of international negotiations. Accelerating this year with the Biden administration taking office. The deal could have significant implications for the global economy, corporate investment and government coffers, likely when it comes into full effect by 2023.

Some details will continue to be developed in the coming months. But tax experts and officials around the world hailed the deal as a success that would reverse the decades-long “race to the bottom” of corporate taxes that has deprived countries of income as companies seek low-tax jurisdictions for their headquarters.

Here’s a look at how the deal will work.

The most distinctive feature of the agreement is 15 percent global minimum taxIt is expected to be enacted by each country that ratifies the treaty. This rate will apply to multinational companies with annual revenue of more than $867 million. The idea is to prevent companies from avoiding paying taxes by finding low-rate havens. Companies that park money in a country that is not part of the agreement will have to pay the difference between that country’s rate and the 15 percent minimum rate to their home country.

Governments will impose the tax on a country-by-country basis, so companies cannot lower their tax bills by seeking tax havens and “scrambling” tax rates. This will allow companies to pay the minimum rate of 15 percent, wherever they are located within the 136 countries that are part of the agreement.

The Biden administration said it would impose a penalty rate on foreign companies located in countries that do not comply with the agreement.

The United States already has its own form of global minimum tax that American companies impose on foreign earnings. To comply with the agreement, Congress will need to increase this tax rate from 10.5 percent to at least 15 percent and switch to a country-by-country system. It is expected to include this in the spending bill negotiated between Democrats and count the tax revenue to help pay for this bill.

Another important part of the deal includes a change in how governments can tax companies in the digital age. Taxes have traditionally been tied to where a company operates, but the deal will update 21st century rules and allow countries to levy taxes on some large and profitable companies based on where their goods and services are sold.

The deal was a response to an attempt by European countries to impose digital services taxes. American tech giants Like Google and Facebook, which operate all over the world, although they do not have physical presence in every country. These taxes prompted the United States to threaten retaliatory tariffs.

The global pact reached a compromise that allowed countries to impose additional taxes on some of the profits of the world’s 100 richest companies based on where their sales were. The right to tax a total of $125 billion in profits will be redistributed among countries around the world. The taxes will apply to companies with global sales exceeding $23 billion and profit margins of at least 10 percent. A quarter of the profits of a company above this threshold will be taxed and the revenue will be apportioned worldwide.

American companies are expected to bear the brunt of this new policy. Treasury Department officials claim that on the balance, the US will receive as much tax revenue as it lost when the plan went into effect. But some analysts predict the US will be a clear loser.

NS Organization for Economic Cooperation and Development It estimates the deal will raise $150 billion annually globally from companies that park their operations in low-tax countries and avoid a higher tax bill.

The Biden administration hopes the deal will make American companies more competitive globally while reducing incentives to move business abroad.

The White House estimates that changes to the international side of the tax code will generate $350 billion in revenue within a decade, as American companies are forced to pay higher taxes on profits earned abroad and are more likely to invest. United States.

In some ways, reaching agreement was the easy part. Now 136 countries need to enact it. This will be easier in some countries than others.

This year may be most challenging in the United States, which has taken the lead in brokering the deal. Democrats are likely to make the necessary changes to accommodate the new minimum rate in the tax and benefits package they hope to pass next month.

But the other part of the deal, which gets rid of digital services taxes and largely concerns tech giants, may require changes in tax treaties. This likely means that some Republicans, who have resisted nearly all of the Biden administration’s tax proposals, will have to offer their support in a separate piece of legislation that lawmakers will consider next year.

Other countries will have to deal with their own legal challenges to comply with the agreement.



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