On Friday, the Organization for Economic Development (OECD) announced a new effective global minimum corporate tax of 15%, as part of a breakthrough agreement representing years of patient diplomacy by world leaders seeking to crack down on tax havens and bring in new revenue.
With 136 countries representing 90% of global GDP now in ascent, the new agreement should swell public coffers by $125 billion annually, OECD said in a statement.
"As of this morning virtually, the entire global economy has decided to end the race to the bottom on corporate taxation," said Treasury Secretary Janet Yellen. Secretary Yellen later called Friday's breakthrough a "once-in-a-generation accomplishment for economic diplomacy."
The so-called "race to the bottom" refers to when countries slash corporate rates, attracting profits to their shores, all the while depriving corporations' home countries of much-needed funds.
The new agreement ends this "race" not only by imposing a minimum levy on corporate profits but also by taxing corporations based on where they operate, not just where they're headquartered. The move represents a sea-change for corporate taxation in the digital age, where behemoths like Facebook
"Today's agreement will make our international tax arrangements fairer and work better," said Mathias Cormann, OECD's Secretary-General, "We must now work swiftly and diligently to ensure the effective implementation of this major reform."
Friday's breakthrough largely sprang from newfound unity among Eurozone members, particularly Ireland and Hungary, both of whom use lower rates to lure in corporate investment and whose ascent was necessary for the agreement to move forward.
The original text of the accord was altered to stipulate that the global minimum will not be raised at a later date; this and an exemption for smaller businesses helped bring Ireland on board. Hungary was granted an exemption, allowing it to transition to the new minimum in ten years rather than the original five.
The new minimum rate should take effect in 2023, giving enough time for treaties to be ratified and for laws to be adjusted across the globe. However, Finance ministers from the so-called "Group of 20" are set to put final touches on the text of the agreement itself in Washington by the end of the week, with world leaders signing off on the deal by month's end.
Key provisions still need to be hammered out, in particular how countries will split the revenues earned from large companies, a point that could prove to be a source of contention.
However, political uncertainty casts a pall over the deal's future ratification, particularly in the U.S.
This year, the Biden Administration largely carried the momentum in the tax talks, which had stalled before the president entered office. Indeed, the global minimum is necessary for Biden's efforts to bring in offshore revenues, an effort which Senate Republicans remain obsequiously opposed. Democrats contend they can ratify the agreement along party lines through a process known as reconciliation; Republicans argue otherwise.
"I am confident that what we need to do to come into compliance with the minimum tax will be included in a reconciliation package," Secretary Yellen told ABC's This Week. I hope that we, that it will be passed and we will be able to reassure the world that the United States will do its part."