2 Jul 2021

Tax overhaul to ensure multinationals pay 'fair share' backed by 130 countries

2:39 pm on 2 July 2021

Officials from 130 countries, including New Zealand, have agreed to overhaul the global tax system to ensure big companies "pay a fair share" wherever they operate.

The OECD said that negotiators had backed a proposed minimum corporate tax rate of at least 15 percent.

US Treasury Secretary Janet Yellen speaks during a press conference at Winfield House in London on June 5, 2021, after attending the G7 Finance Ministers meeting.

US Treasury Secretary Janet Yellen said it was "an historic day" for economic diplomacy. (file photo) Photo: AFP

US Treasury Secretary Janet Yellen said: "Today is an historic day for economic diplomacy."

Tax on big tech firms has been a source of friction between the US and others.

The Organisation for Economic Co-operation and Development (OECD), which led the talks, said that the plans could generate about $US150 billion in tax revenues a year.

But the Paris-based organisation confirmed that Ireland and Hungary - countries with low corporate taxes - had not joined the deal on the global minimum.

New Zealand has joined the agreement, as have all G20 countries, such as the US, UK China and France.

Participating governments are now expected to try to pass relevant laws to bring in the minimum, although details such as possible exemptions for certain industries are still up for negotiation.

"A detailed implementation plan together with remaining issues will be finalised by October 2021," said a statement signed by 130 out of 139 countries and jurisdictions involved in the talks.

Countries have also signed up to new rules on where the biggest multinational companies are taxed. They would see taxing rights on more than $100bn of profits shift to countries where profits are generated, rather than where a business might have its headquarters.

If the deal worked as planned, however, it would still reach countries that did not join. The agreement includes a "top-up" provision, so that a parent company would get an additional bill if a subsidiary paid less than the minimum.

Impact in New Zealand

Meanwhile, a local tax expert said the proposals would likely have limited implications or extra tax income for New Zealand.

KPMG tax partner Darshana Elwela said the proposals as outlined would mean countries being allocated a share of a multinational's global income, which would be taxed accordingly.

He gave the example of a global multinational with revenue of $1 billion, with New Zealand perhaps accounting for 1 or 2 percent of revenue, which would mean an allocation of $10m-$20 million in revenue to this country, which would be taxable.

"New Zealand might end up getting a bit more revenue from these companies."

Elwela said the tax agreement would seem to put an end to any idea of a digital services tax, which some countries have imposed and New Zealand had been talking about.

Nonetheless, he said the agreement was a "watershed" moment for global tax rules that were now catching up with the growth of global digital-based companies and operations.

'No nation has won this race'

The US Treasury Secretary, Janet Yellen, said the agreement sent a sign that a "race to the bottom" on tax rates was coming to an end.

"For decades, the US has participated in a self-defeating international tax competition, lowering our corporate tax rates only to watch other nations lower theirs in response.

"The result was a global race to the bottom: Who could lower their corporate rate further and faster?"

She said that "no nation" had won the race.

The Biden administration has been pushing for a deal internationally while it seeks to raise taxes domestically. It has, for example, called for an increase in the US corporate tax rate from 21 percent to 28 percent.

A participant stands at the OECD headquarters in Paris during the presentation of the Economic Outlook at the 2013 OECD Week on May 29, 2013

The OECD said the plans could generate about $US150 billion in tax revenues a year. Photo: AFP

The news was also welcomed by other finance ministers.

Britain's chancellor Rishi Sunak cited last month's G7 talks in London, where rich nations agreed to battle tax avoidance: "We achieved a historic agreement that will see the largest multinational tech giants pay the right tax in the right countries.

"I'm pleased to see this momentum has continued and welcome the OECD's progress today.

"I look forward to continuing discussions with our global partners in the coming months with a view of finalising the details by October," he said.

French Finance Minister Bruno Le Maire described it as the "most important international tax deal reached since a century" during a news conference.

And German Finance Minister Olaf Scholz said on Thursday that while details still needed to be worked out, the agreement marked "colossal progress" and would allow countries to increase spending on "important priorities" such as infrastructure and efforts to fight climate change.

Explaining its decision not to join the agreement, Ireland said it had not signed up because of reservations over the proposed corporate tax "floor".

"Ireland expressed our broad support ... but noting our reservation about the proposal for a global minimum effective tax rate of 'at least 15 percent'," the government said in a statement.

"As a result of this reservation, Ireland is not in a position to join the consensus."

- BBC/RNZ