Minimum corporate tax rate of 15 per cent gets approval from more than 130 countries - The Globe and Mail

A woman walks past Google offices near the city centre in Dublin in 2013. Ireland, long seen as a tax haven due to its 12.5-per-cent tax rate for large multinationals, was among the last counties to hold out on a minimum corporate tax regime of 15 per cent.

Cathal McNaughton/Reuters

Many of the world’s countries agreed to a new cross-border corporate tax regime Friday that would set a near-global minimum rate of 15 per cent while forcing large multinationals to pay taxes where they conduct business, setting in motion a historic opportunity for governments to collect a greater share of the wealth generated by the world’s richest companies.

The Organization for Economic Cooperation and Development announced the details Friday just hours after three skeptics of the deal – Ireland, Estonia and Hungary – finally agreed to its terms. Ireland in particular has long been seen as a tax haven due to its 12.5-per-cent tax rate for large multinationals. Big Tech companies such as Apple Inc., Facebook Inc. and Google parent Alphabet Inc. have set up key offices there, routinely facing accusations of tax avoidance.

The OECD said 136 countries representing more than 90 per cent of global GDP agreed to the new tax system, including all G20 and European Union states, and expected it to be implemented in 2023.

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The group said it hoped the system would result in more than US$125-billion from nearly 100 of the world’s most profitable multinationals being reallocated to the markets where those profits were generated, for tax purposes. The new minimum 15-per-cent rate, the OECD said, would apply to companies with more than €750-million (US$868-million) in annual income, which it expects will deliver countries an additional US$150-billion in tax revenue each year.

“Today’s agreement will make our international tax arrangements fairer and work better,” said OECD Secretary-General Mathias Cormann in a statement. “This is a major victory for effective and balanced multilateralism. It is a far-reaching agreement which ensures our international tax system is fit for purpose in a digitalised and globalised world economy.”

The decision comes after years of multilateral struggles over how to fairly tax the giants of global industry in the digital age. Physical offices or operations are no longer a requirement for a company to do business in a country, which, thanks to outdated tax laws, allowed for profits to be generated in some jurisdictions without being taxed locally.

The ephemeral nature of digital companies’ operations has allowed them to establish major offices where they can minimize tax bills. Countries such as Ireland built significant portions of their economy by enticing business with its low tax rate. Ireland-domiciled companies or subsidiaries often handle profitable, royalty-paying intellectual property.

More than 800 U.S. companies operate in the country, according to the American Chamber of Commerce Ireland. The country agreed to join the agreement Thursday after the OECD changed language around the minimum tax rate from “at least” 15 per cent to just 15 per cent.

Though thousands of businesses that do not pass the €750-million annual revenue threshold would not be subject to the new minimum 15-per-cent rate, the OECD said that the new regime’s scope could be expanded seven years after the initial rules are implemented.

Federal Finance Minister Chrystia Freeland announced nearly a year ago in a fall economic statement that Canada was prepared to act unilaterally if the prolonged global talks failed to reach a conclusion. Ms. Freeland had said that Canada would implement a 3-per-cent digital-services tax, or DST, on revenues collected from Canadian users by large online companies as of Jan. 1, 2022 in the absence of a deal.

Ms. Freeland’s office did not immediately react to Friday’s announcement, but the minister had described the OECD’s interim agreement in July as a “tremendous achievement.”

Elliot Hughes, who was a tax policy advisor to former Liberal finance minister Bill Morneau and who is now a senior advisor with Summa Strategies, said he would expect Ms. Freeland will drop plans for the new DST in light of Friday’s announcement.

“My sense is this will provide her with the cover she needs to be able to say, now that we’ve got this agreement at the international level – the 15 per cent [minimum corporate tax rate] – the digital services tax is no longer something we’ll be needing to implement,” he said.

The federal government had estimated the proposed new digital-services tax would bring in $3.4-billion in revenue over five years, while the Parliamentary Budget Officer said it could bring in $4.23-billion.

Economist Toby Sanger of the Canadians for Tax Fairness advocacy organization said Friday’s deal gives tech giants “a gigantic tax break” in comparison to the DST that Canada has promised for Jan. 1 should no deal be reached.

“This proposal for taxation of large multinationals is definitely going in the right direction. It just needs to go much further,” he said in a written analysis of Friday’s agreement. The advocacy group, which has called for a crackdown on the use of tax havens, estimates large tech companies would face a tax bill in Canada that is less than half of what would apply under the proposed DST.

Allan Lanthier, a retired partner of a major international accounting firm, said the 15 per cent tax agreement “is a big deal,” but that it still faces hurdles before coming into force.

“The elephant in the room is the United States,” he said, because it is unclear whether U.S. President Joe Biden can secure Congressional support for the plan.

Mr. Lanthier said the details of how taxing rights will be reallocated are less clear, but he predicted Canada will likely put its proposed DST on hold for now.

In addition to implementing Canada’s new commitments to the G20 and the OECD, the recently re-elected federal Liberals will also need to deliver on several tax-specific campaign pledges.

Prime Minister Justin Trudeau promised during the campaign to raise the corporate tax on all bank and insurance company earnings in excess of $1-billion. In addition, these same companies would be required to pay a special fee called a “Canada Recovery Dividend” over a four-year period. The Liberal platform estimated the two measures would raise over $10-billion over four years in new revenue.

The Liberals will also need to secure the support of at least one other party in the minority Parliament. The NDP platform called for a wide range of tax increases for corporations and high wealth individuals, while the Bloc Québécois has frequently urged Ottawa to ensure large technology companies like Facebook and Google pay more in taxes and in contributions to domestic cultural productions.

The Liberals may need to adjust their tax proposals in order to secure the support from at least one other party in the House of Commons.

In an e-mailed statement, Facebook vice-president of global affairs, Nick Clegg, said that “the tax system needs to command public confidence, while giving certainty and stability to businesses. We are pleased to see an emerging international consensus.” Google referred to a February 2021 blog post by Karan Bhatia, its vice-president of global affairs, which stated that the company has “long supported efforts to update international tax rules to arrive at a system where more taxing rights are shifted to countries where products and services are consumed.” Apple did not immediately respond to a request for comment.

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Minimum corporate tax rate of 15 per cent gets approval from more than 130 countries - The Globe and Mail
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