Recent Global Agreement Sets New Rules For Corporate Tax Revenue
Economic Policy Brief #128 | By: Jared Sullivan | November 15, 2021
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Policy Summary
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A new global agreement, endorsed by the Biden administration, aims to improve the international tax system by redistributing revenue that countries earn from taxing multinational corporations. The proposal was finalized and agreed upon on October 8th by the Organization for Economic Cooperation and Development (OECD). It is scheduled to go into effect in 2023.
This long-awaited multilateral agreement represents over 90% of the world’s GDP and includes 136 countries. The agreement rests on a two pillar approach: (1) a new methodology to determine tax revenue distribution among participating countries; and (2) a minimum 15% corporate income tax rate that all countries must abide by. The Agreement brings the international tax system into the 21st century, but also brings uncertain implications for large companies and developing economies alike.
The first mandate of the proposal is directed towards multinational companies pulling in 20 billion or more in revenue and hitting a 10% or higher profit margin; these companies can expect a 25% tax on any profits above their first 10% of profits. Yet this tax revenue will not be realized in the economy in which the company is headquartered in and primarily operates but rather afforded to the government of the location the company is selling in. Economists have estimated this will redistribute 125 Billion USD globally to where there is a large consumer base for foreign goods due to demands not being met at home, e.g in countries such as Brazil and India.
Policy Analysis
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The goal of this redistribution effort is to channel tax revenue to developing economies that are lacking in industry and manufacturing but are home to an increasing level of consumer demand. The international communities’ level of urgency towards this objective has been increasing because of the rapid globalization of the world economy over the last several decades, many developing countries have been missing out on their own consumers’ tax dollars .
As large corporations have increased their sales and presence in these countries, positive externalities have been appreciated but their presence also results in a competitive disadvantage for many industries in the developing countries.
Big tech names like Facebook, Amazon and Google have effectively been able to shop around for countries with low tax rates. The second part of the agreement will inhibit the effectiveness of this practice by setting an international corporate tax minimum of 15%.
There is still strong disagreement on how the changes will affect the various economies involved. Although there is some consensus on the notion that the US will remain relatively tax revenue neutral as tax money will be brought back onshore by the 15% minimum but will be offset by the tax revenue lost from companies that will be taxed by foreign governments.
Small, developing economies like the Bahamas, Bermuda, and the Cayman islands have come to rely on the international investments that their little to no tax rates have historically attracted. The sharp increase may leave these economies in a dire situation as expressed by the G-24 group of developing countries referring to the agreement as “sub-optimal” and “not sustainable even in the short run.”
The agreement aims to bring international competition back to being based on factors conducive to economic growth such as skilled labor, industrial infrastructure, and technology versus a competition of who can offer the lowest corporate tax rate. An estimated 150 Billion USD will be garnered by the US alone as a result.
Engagement Resources
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For further reading, refer to statements from the Biden Administration from October and July.