taxes

EXPLAINER: How global deal stems corporate use of tax havens |

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FRANKFURT, Germany — More than 130 countries have forged a deal on sweeping changes in how big global companies are taxed.

The goal: deterring multinational companies from stashing profits in countries where they pay little or now taxes – better known as tax havens.

The sweeping agreement was struck Friday among 136 countries after talks overseen by the Organization for Economic Cooperation and Development. It would update a century’s worth of international taxation rules to cope with changes brought by digitalization and globalization.

The most important feature: a global minimum tax of at least 15 percent, a key initiative pushed by U.S. President Joe Biden and Treasury Secretary Janet Yellen. Yellen said the minimum tax will end a decadeslong “race to the bottom” that has seen corporate tax rates fall as tax havens sought to attract corporations that take advantage of low rates – but do little actual business in those locations.

Here’s a look at key aspects of the deal:

What problem does it address?

In today’s economy, multinationals are increasingly likely to earn profits from intangibles such as trademarks and intellectual property. Those can be easy to move, and global companies can assign the earnings they generate to a subsidiary in a country where tax rates are very low.

Some countries compete for revenue by using rock-bottom rates to lure companies, attracting huge tax bases that generate large revenue even when tax rates only marginally above zero are applied. Between 1985 and 2018, the global average corporate headline rate fell from 49 percent to 24 percent. By 2016, over half of all U.S. corporate profits were booked in seven tax havens: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore, and Switzerland. That costs the U.S. Treasury $100 billion a year according to one estimate.

How would a global minimum tax work?

The basic idea is simple: Countries would legislate a global minimum corporate tax rate of at least 15 percent for very big companies, those with annual revenues over 750 billion euros ($864 billion.)

Then, if companies have earnings that go untaxed or lightly taxed in one of the world’s tax havens, their home country would impose a top-up tax that would bring the rate to 15 percent.

That would make it pointless for a company to use tax havens, since taxes avoided in the haven would be collected at home. For the same reason, it means the minimum rate would still take effect even if individual tax havens don’t participate.

How would the tax plan address the digitalized economy?

The plan would also let countries tax part of the earnings of the 100 or so biggest multinationals when they do business in places where they have no physical presence. That could be through internet retailing or advertising. The tax would only apply to a portion of profits above a profit margin of 10 percent.

In return, other countries would abolish their unilateral digital services taxes on U.S. tech giants such as Google, Facebook and Amazon. That would head off trade conflicts with Washington, which argues such taxes unfairly target U.S. companies and has threatened to retaliate with new tariffs.

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