By Leigh Thomas
PARIS (Reuters) – A global deal to ensure big companies pay a minimum tax rate of 15% and make it harder for them to avoid taxation has been agreed after Ireland, Estonia and Hungary agreed to sign up to the elusive landmark accord.
The agreement aims to end a four-decade-long “race to the bottom” by governments that have sought to attract investment and jobs by taxing multinational companies only lightly and allowing them to shop around for low tax rates.
Negotiations have been going on for four years, moving online during the pandemic, with support for a deal from U.S. President Joe Biden and the costs of COVID-19 giving additional impetus in recent months.
Out of the 140 countries involved, 136 supported the deal with developing countries Kenya, Nigeria, Pakistan and Sri Lanka abstaining for now.
The Paris-based Organization for Economic Cooperation and Development, which has been leading the talks, said that the deal would cover 90% of the global economy.
“Today we have taken another important step towards more tax justice,” German Finance Minister Olaf Scholz said in a statement emailed to Reuters.
“We now have a clear path to a fairer tax system, where large global players pay their fair share wherever they do business,” Scholz’s British counterpart Rishi Sunak said.
The agreement will set a minimum corporate tax rate of 15% and let governments tax a greater share of foreign multinationals’ profits.
U.S. Treasury Secretary Yellen called the deal a victory for American families as well as international business.
“We’ve turned tireless negotiations into decades of increased prosperity – for both America and the world. Today’s agreement represents a once-in-a-generation accomplishment for economic diplomacy,” Yellen said in a statement.
The OECD said that the minimum rate would see countries collect around $150 billion in new revenues annually while taxing rights on more than $125 billion of profit would be shifted to countries where big multinationals earn their income.
The deal aims to prevent big groups from booking profits in low-tax countries like Ireland regardless of where their clients are, an issue that has become ever more pressing with the rise of tech giants that easily do business across borders.
Ireland, Estonia and Hungary, all low tax countries that had held out, dropped their objections this week as a compromise emerged on a deduction from the minimum rate for multinationals with real physical business activities abroad.
But some developing countries seeking a higher minimum tax rate say their interests have been sidelined to accommodate the interests of richer countries like Ireland, which had refused to sign a deal with a minimum tax rate higher than 15%.
Argentine Economy Minister Martin Guzman said on Thursday that proposals on the table forced developing countries to chose between “something bad and something worse”.
The OECD said that the deal would next go to the Group of 20 economic powers to formally endorse at a finance ministers’ meeting in Washington next Wednesday and then on to a G20 leaders summit at the end of the month in Rome for final approval.
However, there remains some question about the U.S. position which depends in part on tough domestic tax reform negotiations going on in Congress.
Countries that back the deal are supposed to bring it onto their law books next year so that it can take effect from 2023, which many officials close to the talks describe as extremely tight.
(Reporting by Leigh Thomas; Additional reporting by Christian Kraemer in Berlin and Elizabeth Piper in London, Editing by Catherine Evans and Alexander Smith)