After years of disagreement, the Organization for Economic Cooperation and Development hailed a big breakthrough on corporation tax rates on Friday.
A global minimum corporate tax rate of 15% was agreed upon by the Group of Developed Nations. This is a significant move for smaller economies like the Republic of Ireland, which have largely drawn foreign corporations due to a lower tax rate.
The OECD said in a statement Friday that "the historic agreement, signed by 136 countries and jurisdictions representing more than 90% of global GDP, will reallocate more than USD 125 billion in profits from around 100 of the world's largest and most profitable MNEs to countries around the world, ensuring that these firms pay a fair share of tax wherever they operate and generate profits."
The breakthrough comes after various revisions to the original text, including the fact that the 15% rate would not be increased at a later date, and that the new charges will not affect small enterprises.
This aided Ireland's acceptance of the plan, which had previously been opposed to hiking corporation tax rates.
Another long-time opponent of a worldwide tax agreement, Hungary, has altered its mind after receiving assurances that the implementation phase will be prolonged.
Countries must now iron out a few minor matters so that the new agreement can go into effect in 2023.
The pact is "a once-in-a-generation achievement for economic diplomacy," according to US Treasury Secretary Janet Yellen.
Yellen praised the several countries who "agreed to put a halt to the race to the bottom on corporation taxation," and expressed confidence that Congress will use the reconciliation process to promptly implement the agreement in the United States.
"International tax legislation is a difficult problem, but the convoluted language of today's agreement belies how simple and wide the stakes are: When this deal is enacted, Americans will find the global economy a far simpler place to acquire a job, earn a living, or scale a firm," Yellen said.
What is the agreement's content?
The agreement represents a revolution in tax policy because it not only establishes a minimum corporation tax rate, but it also requires businesses to pay taxes where they operate, not simply where their headquarters are.
One aspect that still has to be worked out is the specific formula for calculating how much firms will owe in different areas.
The decision by world leaders was prompted in part by the coronavirus pandemic, which reaffirmed the need for fairer taxes at a time when governments are looking for new sources of revenue.
President Joe Biden made it clear when he was elected in 2020 that he wanted to raise taxes on the wealthy in order to reduce inequality in the United States.