More than 130 countries have signed up to a groundbreaking global deal on corporate tax reform, which would see corporations pay a tax rate of at least 15% to the countries where they earn. This is aimed at eliminating tax havens while bringing in additional $150 billion a year from multinationals.
Despite the reception from other countries of the world, Nigeria, Kenya, Sri Lanka, and Pakistan have held out of this agreement. Recall, in July Nairametrics reported that Nigeria abstained from signing the global tax deal.
Meanwhile, the 136 nations also agreed to a two-year ban on imposing new taxes on tech groups such as Google and Amazon while the Joe Biden administration tries to ratify the deal in the US.
This represents the biggest corporate tax reform for more than a century orchestrated by the Organisation for Economic Co-operation and Development (OECD), which includes a 15% global minimum effective corporate tax rate, plus new rules to force the world’s multinationals to declare profits and pay more in the countries where they do business.
According to information emanating from the deal, the number of nations prepared to sign up fluctuated on Friday, with India only agreeing at the last moment, while China and Brazil were also reluctant signatories. Meanwhile, only Sri Lanka, Pakistan, Nigeria and Kenya held out on the deals.
The difficulties in implementing the deal became apparent when Janet Yellen, US Treasury secretary, urged Congress to “swiftly” enact the proposals by using the so-called reconciliation process, which allows bills to pass the Senate with a simple majority. She said the agreement was a “once-in-a-generation accomplishment for economic diplomacy.”
She said, “As of this morning, virtually the entire global economy has decided to end the race to the bottom on corporate taxation. Rather than competing on our ability to offer low corporate rates, America will now compete on the skills of our workers and our capacity to innovate, which is a race we can win.”
The stakes remain high for the US and countries such as India that have levied digital services taxes on Silicon Valley tech groups. If Congress fails to implement the deal, those countries may go ahead with their digital taxes, sparking trade disputes with the US.
However, the deal gives the US space to ratify the agreement, specifying that “no newly enacted digital services taxes or other relevant similar measures will be imposed on any company from 8 October 2021” for two years.
Why Nigeria rejected it
Developing countries have complained about the lack of revenue they stand to make from the deal on fairer distribution of profits and taxing rights. They point out that this is worsened by the removal of digital service taxes, which was a deal-breaker for Nigeria and Kenya despite OECD estimates showing they would gain.
This is quite significant considering the recent move by the federal government to ensure that social media firms like Twitter begin to remit taxes to Nigeria.
What you should know about the deal
According to the statement from the OECD the framework is divided into two pillars. Pillar one is expected to ensure a fairer distribution of profits and taxing rights among countries.
Notably, pillar one would re-allocate some taxing rights over multinationals from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there.
Under Pillar One, taxing rights on more than USD 100 billion of profit are expected to be reallocated to market jurisdictions each year.
The second pillar seeks to put a floor on competition over corporate income tax, by introducing a global minimum corporate tax rate that countries can use to protect their tax bases. They also capped the minimum corporate income tax rate at 15% under its pillar two.