Under the terms of the deal, national governments would tax eligible multinational corporations at a minimum 15% tax rate starting in 2023.
Following years of negotiations, all member nations of the Organization for Economic Cooperation and Development (OECD) and the Group of Twenty (G20) have finally agreed on a 15% global minimum corporate tax rate on multinationals, which is expected to recoup billions of dollars in lost revenue.
The framers finalized the landmark deal, referred to as the Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy, on October 8. Originally endorsed by finance ministers from the Group of Seven nations in June, the deal was supported by all OECD and G20 countries, including Ireland, Hungary and Estonia, which had initially opted out of it.
The latter three EU countries were concerned about the effects such a tax rate could have on their economies, which rely on attractive corporate tax rates to attract companies and compete against larger economies. But with some last-minute persuasion and concessions, the deal was finally done. Kenya, Nigeria, Pakistan and Sri Lanka have yet to join the agreement.
Under the terms of the deal, national governments would tax eligible multinational corporations at a minimum 15% tax rate starting in 2023. A company’s tax status will also no longer be exclusively determined by where they have a physical presence. Instead, countries or markets where those companies have business activities and earn revenue will be able to obtain a share of that revenue.
Multinationals with global sales more than €20 billion ($23.2 billion) and profitability above 10% will be covered by the new rules, with 25% of their profits above the 10% threshold to be reallocated to market jurisdictions where they do business. More than $150 billion in new revenue is expected to flow to those jurisdictions annually.
“Today’s agreement will make our international tax arrangements fairer and work better,” said OECD Secretary-General Mathias Cormann in the announcement. “It is a far-reaching agreement which ensures our international tax system is fit for purpose in a digitalized and globalized world economy.”