136 countries reach historic deal on global minimum corporate tax

• A global deal to ensure big companies pay a minimum tax rate of 15% and make it harder for them to avoid taxation has been agreed by 136 countries according to OECD.
• Four countries – Kenya, Nigeria, Pakistan and Sri Lanka – had not yet joined the agreement, but that the countries behind the accord together accounted for over 90% of the global economy.

Global minimum tax

• Increasingly, income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to low-tax countries’ jurisdictions.
• This allows companies to avoid paying higher taxes in their traditional home countries.
• The use of tax havens costs governments $500 billion to $600 billion in lost corporate tax revenue each year, according to IMF.
• A global minimum tax establishes a system under which a company from a specific country will pay at least a certain percentage of its profits in taxes, regardless of where in the world those profits are being earned.
• In a country that imposes a global minimum tax rate, a domestic company that moves some of its operations to a low-tax jurisdiction overseas would have to pay its home country’s government the difference between that minimum rate and whatever the firm paid on its overseas earnings. .

Working of deal

• The global minimum tax rate would apply to overseas profits of multinational firms with €750 million in sales globally.
• Governments could still set whatever local corporate tax rate they want.
• However, if companies pay lower rates in a particular country, their home governments could ""top up"" their taxes to the 15 per cent minimum, eliminating the advantage of shifting profits.