The announcement on Friday was made in an effort to address the impact of globalization and digitization on the world economy. It would allow countries tax some earnings from companies that are located in other countries and make money online through web advertising, retailing, or any other activity.
The agreement was forged by Joe Biden, the U.S. president. This is as governments around the globe seek to increase revenue after the COVID-19 pandemic.
The Organization for Cooperation and Economic Development (Paris-based) announced the agreement between 136 countries that represent 90% of the global economic system. It hosted the talks that led there. According to the OECD, governments would benefit from the minimum tax of $150 billion.
Janet Yellen, U.S. Treasury Secretary, stated that today's agreement was a "once-in-a generation achievement for economic diplomacy". It would end the "race to bottom", in which countries compete with each other for lower tax rates.
She stated that America will no longer compete with low corporate rates. Instead, America will be competing on the ability of its workers to invent and the skills of their workers. This is a race America can win.
Before the deal can be implemented, there are several obstacles. The U.S. approval for the related tax legislation, as proposed by Biden, will be crucial, particularly since many of the largest multinational corporations in the U.S. The entire project would be in doubt if Congress rejects it.
Google and Amazon, two of the largest U.S. tech firms, have supported the OECD negotiations. In return for the right of taxing a portion of their earnings under the global scheme, countries could agree to remove individual digital service taxes that they had imposed on themselves.
This means that companies will only deal with one international tax system and not multiple ones depending on where they are located.
Bruno Le Maire, French Finance Minister, said that "this agreement opens the door to a true tax revolution in the 21st Century." "Finally, the digital giants will be paid their fair share of taxes in the countries -- France included -- where they produce."
Thursday's announcement by Ireland was that it would be joining the agreement. This is a departure from a low tax policy that led to companies such as Google and Facebook establishing European operations in Ireland.
The Irish agreement was a significant step forward, but developing countries raised objections. Nigeria, Kenya and Pakistan have all indicated that they won't sign up.
Tax fairness and anti-poverty advocates claim that the majority of new revenue will go to wealthy countries, while offering less to developing countries that are more dependent upon corporate taxes. According to the G-24 group of developed countries, the deal without a larger share of revenues from reallocated profits would not be sustainable in the long-term.
Next week, the Group of 20 finance ministers will discuss the deal. Then, the G-20 leaders will approve the final version at a summit in Rome at October's end.
To implement the tax on companies with profits in another country, countries would sign a diplomatic agreement. This provision would impact around 100 global companies.
The second part, which is the global minimum of 15%, will apply to companies earning more than 750 millions euros ($864million) per year. It will be adopted into national law by countries following the OECD's model rules. The top-up provision would require that tax paid home would be avoided and would not be applied to companies with more than 750 million euros in revenue. The deal will have the greatest effect if at least the major hub countries implement the minimum tax.
