G20 Leaders Approve a Global Minimum Corporate Tax Rate

President Biden and other world leaders who gathered for the Group of 20 summit in Rome formally endorsed a new global minimum business tax Saturday in what is presented as a historic achievement after months of negotiations, according to the Organization for Economic Cooperation and Development (OECD). The new global minimum tax rate of 15 percent is intended to reverse a decades-long reduction in corporate tax rates across the world. The agreement, which was previously endorsed by finance ministers from each country and would have an impact on Big Tech, now faces the formidable task of being turned into multinational legislation.

Nearly 140 countries, comprising more than 90 percent of total global economic output, have backed the deal, but now each must implement new policies in a process that will take time and must potentially overcome internal political opposition. Nonetheless, the fact that the concept minimum global minimum tax rate has been officially sanctioned is a feather in the cap of U.S. Treasury Secretary Janet Yellen, for whom achieving an international corporate tax minimum was a top priority.

“Today, every G20 head of state endorsed a historic agreement on new international tax rules, including a global minimum tax that will end the damaging race to the bottom on corporate taxation, It’s a critical moment for the U.S. and global economy,” Yellen said in a statement quoted in The Washington Post.

The agreement intends to rein-in large companies who set up nominal operations in overseas territories that offer favorable tax rates, directing revenue away from tax bases in territories in which they transact substantial business.

The deal updates international tax rules “to reflect the realities of the digital era,” writes The Verge. Instead of taxing a company “where its operations are,” the new rules allow countries to apply and collect taxes where services are sold. The changes are likely to have “a big impact on U.S. tech firms’ European operations. Many such companies are headquartered in Ireland to benefit from its lower 12.5 percent tax rate, but sell services across the whole of the continent.”

Yellen has been vocal about action to prevent corporations from “playing countries off each other to push corporate tax rates lower and lower,” writes WaPo. “The average corporate tax rate globally has fallen from about 40 percent in 1980 to roughly 23 percent in 2020, according to the Tax Foundation.”

In 2017, about 40 percent of “profits earned by the world’s multinational firms — or more than $700 billion — was stashed in tax havens,” WaPo says. The new global minimum tax rate applies only to firms that produce annual revenue of more than $850 million. WaPo estimates the new policy would generate about $150 billion in added global tax revenue every year.