Countries led by France have already started imposing unilateral digital taxes aimed at US tech giants such as Amazon, Google and Facebook; under the deal, they would agree to withdraw those taxes, regarded as unfair trade practices by the US, in favour of the global approach.
The French tax on tech giants prompted retaliatory tariffs under former US President Donald Trump, and France has welcomed the Biden administration's push to reach a global deal.
"Online giants must pay their faire share of taxes where they have activities," he said. "There is no reason a small or medium business should pay more taxes than an online giant simply because it's physically present in the country where it carries out its activities."
US Treasury Secretary Janet Yellen called it a "historic day."
"For decades, the United States has participated in a self-defeating international tax competition, lowering our corporate tax rates only to watch other nations lower theirs in response," she said in a statement. "The result was a global race to the bottom: Who could lower their corporate rate further and faster?"
Yellen said lower rates deprived countries of money for infrastructure, education and efforts to fight the pandemic.
Manal Corwin, a tax principal at professional services firm KPMG and a former Treasury Department official, said the deal put together "the big pieces" of an overall agreement, although technical complexities remain to be worked out. She said what was approved was "pretty much the US proposal," noting that it was "hugely important" for the US to obtain a commitment from other countries to withdraw their unilateral digital taxes.
Under the deal, countries could tax their companies' foreign earnings up to 15 per cent if they go untaxed through subsidiaries in other countries. That would remove the incentive to use accounting and legal schemes to shift profits to low-rate countries where they do little or no business, since the profits would be taxed at home anyway. Such tax avoidance practices cost countries between US$100 billion ($143.5b) and US$240b in lost revenue annually, according to the OECD.
Not all of the 139 countries that joined the talks signed on to the deal. Ireland's finance ministry said it had "broad support" for the approach used in the agreement but could not agree to the 15 per cent minimum. Finance Minister Paschal Donohoe has said the country's 12.5 per cent rate is a "fair rate." Ireland said it would "constructively engage" in discussions going forward.
Signers included Bermuda and the Cayman Islands, regarded by economists as tax havens, and major economic powers China and India.
More discussion is expected at the meeting of the G-20 finance ministers in Venice next week, ahead of a final endorsement by the full G-20 summit of country leaders in October. The proposal to tax companies where they have revenue but no physical presence would require countries to sign up for a multilateral convention, while the minimum corporate tax could be adopted by each country through national legislation on a voluntary basis.
Tax experts say that voluntary approach could work if adopted by countries where many multinationals have their headquarters, such as the US and in Europe, by making clear to companies that even if they avoid tax by moving profits to overseas subsidiaries, those profits will be taxed at home up to the minimum.
In the US, Biden has proposed a 21 per cent minimum rate on overseas earnings of big American companies to deter them from shifting profits to tax havens. Biden's US tax must first pass Congress, where the Democratic president has only a narrow majority.
- AP
