Investing News

Global Agreement Reached on Minimum Corporate Tax Rate

The Organization for Economic Cooperation and Development (OECD) announced on Oct. 8, 2021, that—effective in 2023—its members have agreed to set a global corporate minimum tax rate of 15%. A key factor in concluding the deal was gaining the support of Ireland and other small countries that had used low corporate tax rates as an incentive for large companies to relocate from higher tax jurisdictions.

“The landmark deal, agreed by 136 countries and jurisdictions representing more than 90% of global GDP, will also reallocate more than USD 125 billion of profits from around 100 of the world’s largest and most profitable MNEs [multinational enterprises, or multinational corporations] to countries worldwide, ensuring that these firms pay a fair share of tax wherever they operate and generate profits,” the OECD indicated in its statement.

OECD Agrees on Global Minimum Corporate Tax Rate

  • The rate is set at 15% and will not be raised.
  • Corporations are to pay tax wherever they operate, not just in the HQ country.
  • Details on how taxes are to be spread across jurisdictions are to be determined.
  • The deal is set to take effect in 2023.

Key Provisos of the Deal

Key aspects of the deal are that the 15% minimum rate will not be increased in the future and that it will not apply to small businesses. The former was critical to gaining Ireland’s assent. Another longtime opponent of such a deal, Hungary, agreed after being assured that the implementation period will be long.

Additionally, the deal will force companies to pay taxes where they operate and not where they are domiciled, or headquartered. The precise methodology for determining how multinational companies will divide their tax payments among the various jurisdictions in which they operate is yet to be determined.

Hailed By Biden Administration

The Biden administration is looking to raise corporate taxes as partial payment for the massive surge in federal spending since the outbreak of the COVID-19 pandemic. The OECD corporate tax deal is thus a very positive development from the administration’s standpoint.

In a statement, U.S. Secretary of the Treasury Janet Yellen called the agreement “a once-in-a-generation accomplishment for economic diplomacy” that will “end the race to the bottom on corporate taxation.” She expressed hope that Congress will use the reconciliation process to make the deal effective in the United States and claimed that, “When this deal is enacted, Americans will find the global economy a much easier place to land a job, earn a living, or scale a business.”