By Jeph Ajobaju, Chief Copy Editor
Finance ministers representing the world’s largest 19 largest economies and the European Union (EU) – called the G20 – have announced support for the 15 per cent global corporate tax rate agreed by the G7 and signed up to by 132 countries.
The policy is expected to be ratified by G20 leaders at their summit in Rome in October.
Despite the immense benefits of the tax which will ensure a level playing field in a fairer system, eight countries have abstained from signing the deal. Nigeria and Kenya are the only two African countries among the eight.
The others are Estonia, Hungary, Ireland, Barbados, Sri Lanka, St Vincent and Grenadines.
Nonetheless, G20 finance ministers have backed an “historic” plan which will see multinational companies pay their “fair share” of tax around the world, the BBC reports.
The plan to battle tax avoidance puts in place a minimum global corporate tax rate of 15 per cent expected to yield $150 billion yearly.
It is likely to affect companies like Amazon and Facebook, hence the deal is also called tech tax.
So far, 132 countries have signed up to the framework, being championed by The Organisation for Economic Cooperation and Development (OECD).
The agreement is a further boost for the plan signed up to by leaders of the G7 major economies in Cornwall, England in June.
The G20 finance ministers announced their support following a meeting in Venice, Italy.
UK Chancellor Rishi Sunak hailed the deal as “historic”, adding it would ensure the “global tax system is fit for purpose in a digital age”.
French Finance Minister Bruno Le Maire said there would be “no turning back”.
“We are putting an end to the race to the bottom and the digital giants will now pay their fair share of taxes,” he added. “It’s a once-in-a-century tax revolution.”
The policy – which will also make companies pay more in the countries where they do business – will now go to a meeting of G20 leaders in October for final consideration.
Reasons for changing the rules
According to the BBC, governments have long grappled with the challenge of taxing global companies operating across many countries.
That challenge has grown with the boom in huge tech corporations like Amazon and Facebook.
At the moment companies can set up local branches in countries that have relatively low corporate tax rates and declare profits there.
That means they only pay the local rate of tax, even if the profits mainly come from sales made elsewhere. This is legal and commonly done.
The deal aims to stop this from happening in two ways.
First, it aims to make companies pay more tax in the countries where they are selling their products or services, rather than wherever they end up declaring their profits.
Second, a global minimum tax rate would help avoid countries undercutting each other with low tax rates.
Two pillars of tax framework
The OECD explained that the framework is divided into two pillars. Pillar One ensures a fairer distribution of profits and taxing rights among countries.
It reallocates taxing rights over multinationals from their home countries to the markets where they operate and earn profits, regardless of whether or not firms have a physical presence there.
Pillar One also reallocates every year taxing rights on more than $100 billion profit to market jurisdictions.
Pillar Two puts a floor on competition over corporate income tax by introducing a global minimum corporate tax rate that countries can use to protect their tax bases.
It also caps the minimum corporate income tax rate at 15 per cent.
Accommodates various interests
OECD Secretary General Mathias Cormann said “after years of intense work and negotiations, this historic package will ensure that large multinational companies pay their fair share of tax everywhere.
“This package does not eliminate tax competition, as it should not, but it does set multilaterally agreed limitations on it.
“It also accommodates the various interests across the negotiating table, including those of small economies and developing jurisdictions.
“It is in everyone’s interest that we reach a final agreement among all Inclusive Framework Members as scheduled later this year.”