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Thursday, March 30, 2023

A global tax deal is close. This is how it will work.

WASHINGTON – G20 leaders are set to sign the most radical overhaul of the international tax system in a century when they meet in Rome this weekend, promulgating a 15 percent global minimum tax and changes in how governments can levy fees on large, profitable multinationals.

The agreement is the result of years of intense international negotiations that gained momentum this year when the Biden administration came to power. When fully operational, most likely by 2023, the treaty could have serious implications for the global economy, corporate investment and government coffers.

Some details will be clarified in the coming months. But tax experts and officials around the world hailed the agreement as an achievement that will reverse decades of “race to the bottom” in corporate taxation that deprived countries of revenues as companies sought low-tax jurisdictions for their headquarters.

Let’s see how the deal will work.

The most notable feature of the deal is the 15 percent minimum global tax that is expected to be imposed by each country that accepts the deal. This rate will apply to multinational corporations with annual revenues of over $ 867 million. The idea is to dissuade companies from avoiding taxes by finding low-rate safe havens. Companies that place money in a country not participating in the transaction will have to pay the difference between that country’s rate and a minimum rate of 15 percent to their home country.

Governments will apply the tax on a country-by-country basis to prevent companies from lowering their tax bills by simply seeking tax havens and mixing up their tax rates. This ensures that companies will actually pay the 15 percent minimum rate no matter where they are in the 136 countries involved in the deal.

And the Biden administration said it would impose fines on any foreign corporations based in countries that do not comply with the agreement.

The United States already has its own form of global minimum tax that applies to foreign profits of American companies. To implement the agreement, Congress will have to raise this tax rate from 10.5 percent to at least 15 percent and move to a country-by-country system. He is expected to incorporate this into the spending bill that is being debated among Democrats and calculate tax revenues to help pay for the bill.

Another important part of the deal involves changing how governments can tax companies in the digital age. Taxes have traditionally depended on where the company operates, but the deal will update the rules for the 21st century and allow countries to levy taxes on some large and profitable companies based on where their goods and services are sold.

The agreement was in response to an attempt by European countries to impose taxes on digital services for American tech giants like Google and Facebook, which operate around the world, even if they don’t have a physical presence in every country. These taxes prompted the US to threaten reciprocal tariffs.

The Global Pact has reached a compromise that allows countries to surcharge a portion of the profits of some of the world’s top 100 companies, depending on where their sales are. The right to tax $ 125 billion in profits will be redistributed among countries around the world. The taxes will apply to companies with global sales of over $ 23 billion and profit margins of at least 10 percent. A quarter of the company’s profits exceeding this threshold will be taxed and the revenue will be distributed globally.

US companies are expected to bear the brunt of this new policy. Treasury officials say the United States will end up with roughly the same tax revenue it will lose after the plan goes into effect. However, some analysts predict that the United States will face a net loss.

The Organization for Economic Co-operation and Development estimates that the agreement will raise $ 150 billion annually worldwide from companies that have placed their operations in low-tax countries, avoiding increasing tax bills.

The Biden administration hopes the deal will make American companies more competitive in the global marketplace, while reducing incentives for them to relocate jobs overseas.

The White House estimates that the changes it makes to the international portion of the tax code will generate $ 350 billion in revenue over ten years as American companies are forced to pay higher taxes on profits they earn overseas and are more likely to invest in operations. to the United States.

In some ways, reaching an agreement was the easy part. Now 136 countries must accept it. This will be easier in some countries than in others.

This could be the most challenging in the United States, which took the lead in closing the deal this year. Democrats will likely be able to make the necessary changes to meet the new minimum rate in the tax and welfare package they hope to pass next month.

However, the other part of the deal, which eliminates taxes on digital services and applies mainly to tech giants, may require changes to tax treaties. This would likely mean that some Republicans, who have resisted nearly all of the Biden administration’s tax proposals, would have to offer their support in separate legislation that lawmakers will work on next year.

Other countries will have to deal with their own legislative challenges to comply with the agreement.

World Nation News Desk
World Nation News Deskhttps://worldnationnews.com/
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