Paris/Washington D.C.: On a historic day for economic diplomacy, 130 countries representing more than 90 percent of global GDP joined a new two-pillar plan to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate, the Organisation for Economic Co-operation and Development (OECD), stated here today.
The countries joined the Statement establishing a new framework for international tax reform. A small group of the Inclusive Framework’s 139 members have not yet joined the Statement at this time. The remaining elements of the framework, including the implementation plan, will be finalised in October.
The framework updates key elements of the century-old international tax system, which is no longer fit for purpose in a globalised and digitalised 21st century economy.
The two-pillar package – the outcome of negotiations coordinated by the OECD for much of the last decade – aims to ensure that large Multinational Enterprises (MNEs) pay tax where they operate and earn profits, while adding much-needed certainty and stability to the international tax system.
Pillar One will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs, including digital companies. It would re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there.
Pillar Two seeks to put a floor on competition over corporate income tax, through the introduction of a global minimum corporate tax rate that countries can use to protect their tax bases.
The two-pillar package will provide much-needed support to governments needing to raise necessary revenues to repair their budgets and their balance sheets while investing in essential public services, infrastructure and the measures necessary to help optimise the strength and the quality of the post-COVID recovery.
Under Pillar One, taxing rights on more than USD 100 billion of profit are expected to be reallocated to market jurisdictions each year. The global minimum corporate income tax under Pillar Two – with a minimum rate of at least 15% – is estimated to generate around USD 150 billion in additional global tax revenues annually. Additional benefits will also arise from the stabilisation of the international tax system and the increased tax certainty for taxpayers and tax administrations.
“After years of intense work and negotiations, this historic package will ensure that large multinational companies pay their fair share of tax everywhere,” OECD Secretary-General Mathias Cormann said. “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,” Cormann said.
Participants in the negotiation have set an ambitious timeline for conclusion of the negotiations. This includes an October 2021 deadline for finalising the remaining technical work on the two-pillar approach, as well as a plan for effective implementation in 2023.
The US President Joe Biden said today marks an important step in moving the global economy forward to be more equitable for workers and middle class families in the United States and around the world.
“I want to thank all the signatories of the Paris OECD statement — 130 countries — for coming together to endorse a global minimum tax rate of at least 15 percent…With a global minimum tax in place, multinational corporations will no longer be able to pit countries against one another in a bid to push tax rates down and protect their profits at the expense of public revenue. They will no longer be able to avoid paying their fair share by hiding profits generated in the United States, or any other country, in lower-tax jurisdictions. This will level the playing field and make America more competitive. And it will allow us to devote the additional revenue we raise to making generational investments, which are necessary to keep America’s competitive edge razor sharp in today’s global economy,” Biden said. He added that he promised to lead the world to deliver a foreign policy for the middle class, “and today, we are doing just that”.
The US President said reaching this consensus wasn’t easy. “It took American vision, as well as a commitment to closely cooperate with our partners around the world. It’s a testament to how leadership rooted in our values can deliver important progress for families everywhere.” He further added: “Building on this agreement will also require us to take action here at home. It’s imperative that we reform our own corporate tax laws, as I proposed in my Made in America tax plan.” He said the USA must adopt the global minimum tax, “among other measures I have proposed”, to make sure corporations pay their fair share. He urged the Congress to pass his Made in America tax plan “to bring good paying jobs home and make sure our tax code works for families, workers, and small businesses, not just profitable corporations and billionaires”.
In Washington DC, US Secretary of the Treasury Janet L. Yellen while describing today’s development as “historic”, said it gave a clear sign: the race to the bottom is one step closer to coming to an end. “In its place, America will enter a competition that we can win; one judged on the skill of our workers and the strength of our infrastructure. We have a chance now to build a global and domestic tax system that lets American workers and businesses compete and win in the world economy.”
Yellen said that for decades, the United States had participated in a self-defeating international tax competition, lowering is corporate tax rates only to watch other nations lower theirs in response. The result was a global race to the bottom: Who could lower their corporate rate further and faster?
“No nation has won this race. Lower tax rates have not only failed to attract new businesses, they have also deprived countries of funding for important investments like infrastructure, education, and efforts to combat the pandemic. In the United States, this agreement will ensure that corporations shoulder a fair share of that burden,” he said.
He further said President Joe Biden had spoken about a “foreign policy for the middle class,” “and today’s agreement is what that looks like in practice”.
– global bihari bureau
