WASHINGTON — Leaders of the Group of 20 nations are set to sign off on the most sweeping overhaul of the international tax system in a century when they gather in Rome this weekend, ushering in a 15 percent global minimum tax and changes to how governments can impose levies on large, profitable multinational companies.
The agreement is the result of years of sputtering international negotiations that gathered pace this year when the Biden administration took office. When the pact is fully enacted, most likely by 2023, it could have significant implications for the global economy, corporate investment and government coffers.
Some details will continue to be refined in the coming months. But tax experts and officials around the world have hailed the agreement as an achievement that will reverse decades of a “race to the bottom” in corporate taxation that have deprived nations of revenue as companies sought low-tax jurisdictions for their headquarters.
Here’s a look at how the deal will work.
A 15 percent global minimum tax
The most prominent feature of the deal is the 15 percent global minimum tax, which is expected to be enacted by each country that has agreed to the deal. That rate will apply to multinational corporations with annual revenues of more than $867 million. The idea is to discourage companies from being able to avoid paying taxes by finding havens with low rates. Companies that do park money in a country that is not part of the deal would be required to pay the difference between that nation’s rate and the 15 percent minimum rate to their home country.
Governments will apply the tax on a country-by-country basis, so that companies cannot lower their tax bill simply by seeking out tax havens and “blending” their tax rates. That will ensure that companies actually pay the 15 percent minimum rate regardless of where they locate within the 136 countries that are part of the deal.
And the Biden administration has said it would impose a penalty rate on any foreign corporations based in countries that did not abide by the agreement.
The United States already has its own form of global minimum tax, which it applies to the foreign profits of American companies. To comply with the agreement, Congress will have to raise that tax rate from 10.5 percent to at least 15 percent and switch to the country-by-country system. It is expected to include this in the spending bill that is being negotiated among Democrats and count revenue from the tax to help pay for that legislation.
Pay where you play
Another crucial part of the agreement involves a shift in how governments can tax companies in the digital era. Taxes have traditionally depended on where a company operates, but the deal will update rules for the 21st century and allow countries to levy taxes on some large and profitable companies based on where their goods and services are sold.
The agreement was a response to an attempt by European countries to impose digital services taxes on American technology giants such as Google and Facebook, which operate all over the world, even if they do not have a physical presence in every country. Those taxes prompted the United States to threaten retaliatory tariffs.
The global pact reached a compromise that allows countries to impose an additional tax on some of the profits of about 100 of the world’s richest companies based on where their sales are. The right to tax a total of $125 billion of profits will be reallocated among countries around the world. The taxes will be applied to companies with global sales of more than $23 billion and profit margins of at least 10 percent. A quarter of a company’s profit above that threshold will be taxed, with the revenue divvied up around the world.
American companies are expected to bear the brunt of this new policy. Treasury Department officials contend that, on balance, the United States will gain about as much tax revenue as it loses once the plan is enacted. However, some analysts predict that the United States would be a net loser.
The money at stake
The Organization for Economic Cooperation and Development estimates that the agreement will raise $150 billion a year globally from companies that have parked their operations in low-tax nations, avoiding a higher tax bill.
The Biden administration hopes that the agreement will make American companies more competitive globally while reducing incentives for them to move jobs abroad.
The White House estimates that the changes it is making to the international side of the tax code will raise $350 billion in revenue over a decade as American companies are forced to pay higher taxes on profits they earn abroad and are more likely to invest in operations in the United States.
In some respects, reaching the agreement was the easy part. Now 136 countries must enact it. That will be easier in some countries than others.
It could be most challenging in the United States, which took a leading role in brokering the deal this year. Democrats are likely to be able to make the required changes to comply with the new minimum rate in the tax and social welfare package that they hope to pass next month.
However, the other part of the deal that, which gets rid of the digital services taxes and applies largely to the technology giants, could require changes to tax treaties. That would probably mean that some Republicans, who have resisted nearly all of the Biden administration’s tax proposals, would have to offer their support in separate legislation that lawmakers will tackle next year.
Other countries will have to deal with their own legislative challenges to comply with the agreement.