G20 leaders reach deal to set 15% tax on multinationals’ global profits

October 31, 2021, 7:53 AM UTC

Leaders of the world’s biggest economies formally backed an ambitious plan to overhaul the way countries tax multinational companies in a bid to stem competition for the lowest rates.

All of the leaders at a Group of 20 summit in Rome endorsed the new rules on Saturday, “including a global minimum tax that will end the damaging race to the bottom on corporate taxation,” U.S. Treasury Secretary Janet Yellen said in a statement. 

A senior U.S. administration official, traveling with President Joe Biden, earlier called the plan a historic reshaping of the rules for the global economy that will force corporations to pay their fair share of taxes. That echoed previous comments Yellen, whose support helped push forward a deal that languished during the administration of President Donald Trump.

The pact won support in principle from 136 governments in October under the auspices of the Organization for Economic Cooperation and Development. G-20 finance ministers endorsed a framework for the agreement in July.

The G-20’s endorsement of the deal stands out at a summit that looks unlikely to produce any additional substantial agreements. Leaders have failed to make serious progress on other prominent issues, including climate change and debt relief for low-income countries.

The tax pact has two sweeping objectives. It intends first to halt the effort by multinational companies to shift profits into low-tax havens through a new global minimum tax of 15% for multinational companies. It also attempts to address the increasingly digital nature of international commerce by taxing companies, in part, on where they do business instead of where they book profits.

While the deal has overcome some major impediments — such as getting low-tax Ireland to sign on — it faces several potential snags before it comes into force and proves effective, including the creation of a credible dispute resolution mechanism.

Signatory countries must also follow through by enacting domestic legislation to implement the new tax rules and by formally approving a multilateral convention, to be drafted by the OECD.

The U.S. and five European governments helped the agreement along with a side deal, announced Oct. 21. It allows the European countries to retain, for now, so-called digital services taxes on technology giants like Facebook Inc. and Amazon.com Inc., which U.S. officials said unfairly discriminated against American companies. That allows those nations to maintain revenues and keeps the pressure on Congress to approve the new rules over objections from top Republicans.

Tax Credits

If and when a new global tax regime comes into force in the next two years, the European countries will offer a credit to effectively refund any taxes collected in excess of what corporations would pay under the global tax deal.

Yellen said U.S. companies and workers, rather than competing on the ability to offer lower taxes, can now compete on the basis of skills, ideas and innovation, “which is a race we can win.”

Despite the Biden administration’s hearty backing, the overall deal may still face its biggest challenge in the U.S., where it’s uncertain whether the president can convince enough lawmakers to approve the new reallocation of taxes.

While congressional Democrats can enforce the 15% minimum tax on their own this fall as part of Biden’s proposed social-spending package, enacting the tax-reallocation portion may take several more months and will face stiff opposition from Republicans.

“The Biden administration retreated by failing to demand immediate repeal of discriminatory taxes, which will continue for years, if not indefinitely,” Senator Michael Crapo of Idaho and Representative Kevin Brady of Texas — the top two Republicans on Congress’s tax-writing committees — said in a statement on Oct. 22. “The administration simply settled for an empty promise — if we reform our tax laws to these countries’ satisfaction, then they will grant U.S. businesses tax credits against future taxes.”

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