Officials from 130 countries on June 1 agreed to establish a new framework for international tax reform, the Organisation for Economic Cooperation and Development (OECD) announced.
The two-pillar package would mean that multinational companies, including Big Tech, would be forced to pay a minimum 15 percent tax in each country they operate in, regardless of whether firms have a physical presence there.
This would remove the incentive to use tax havens and legal schemes to shift profits to low-rate countries where they do little or no business.
The OECD said more than $100 billion in profit is expected to be reallocated to market jurisdictions each year, while about $150 billion is expected to be raised from the global minimum tax rate.
“Additional benefits will also arise from the stabilisation of the international tax system and the increased tax certainty for taxpayers and tax administrations,” the organization added.
The organization said 130 countries, including the United States, UK, China, and France representing more than 90 percent of global GDP, have backed the agreement at the talks, and their finance ministers are scheduled to approve the agreement on July 9.
A source told Reuters that it had taken tough negotiations to get Beijing on board. A U.S. administration official said there were no China-specific carveouts or exceptions in the deal.
The conclusion of the negotiations, including the remaining elements of the framework and the implementation plan, will be finalized by October 2021 as well as a plan for effective implementation in 2023.
However, the agreement comes despite staunch opposition from low-tax countries such as Ireland, Estonia, Hungary, Peru, Barbados, Saint Vincent and the Grenadines, Sri Lanka, Nigeria, and Kenya, who did not sign the agreement.
Irish Finance Minister Paschal Donohoe, whose country has attracted many big U.S. tech firms with its 12.5 percent corporate tax rate, said he was “not in a position to join the consensus,” but would still try to find an outcome he could support.
“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 in a statement. “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 added.
President Joe Biden also called the agreement 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.”
“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,” Biden said in a statement.
“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,” he added.
Meanwhile, U.S. Treasury Secretary Janet Yellen said the agreement marks a “historic day for economic diplomacy.”
“Today’s agreement by 130 countries representing more than 90 percent of global GDP is a clear sign: the race to the bottom is one step closer to coming to an end,” Yellen said in a statement.
The announcement comes ahead of further talks on tax reforms expected to be held between finance ministers at G20 meetings in Venice in July, ahead of a final endorsement by the full G-20 summit of country leaders in October.
The Associated Press contributed to this report.