Most of the world’s countries agreed to a new cross-border corporate tax regime Friday that would set a near-global minimum rate of 15 per cent, while forcing large multinationals to pay taxes where they conduct business.
The agreement sets in motion a historic opportunity for governments to collect a greater share of the wealth generated by the world’s richest companies. Finance Minister Chrystia Freeland said in a statement Friday afternoon that Ottawa strongly supports international efforts “to end the corporate race to the bottom” and that Canada will work with its international partners to implement the deal.
The minister also said the federal government will still go ahead with planned legislation to impose an alternative Digital Services Tax, but that the tax would only be imposed as of Jan. 1, 2024, in the event that Friday’s deal has not yet come into force by then. Ms. Freeland had previously pledged to impose such a tax as of Jan. 1, 2022, if no global tax deal had been reached.
“I welcome this historic international agreement. It is a win for the Canadian middle class and for Canadian businesses,” she said.
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The Organization for Economic Co-operation and Development announced the details Friday just hours after three skeptics of the deal – Ireland, Estonia and Hungary – finally agreed to its terms.
Ireland in particular has long been seen as a tax haven because of its 12.5-per-cent tax rate for large multinationals. Big Tech companies such as Apple Inc., Facebook Inc. and Google parent Alphabet Inc. have set up key offices there, routinely facing accusations of tax avoidance.
The OECD said 136 countries representing more than 90 per cent of global GDP agreed to the new tax system, including all G20 and European Union states, and expected it to be implemented in 2023. The group said it hoped the system would result in more than US$125-billion from nearly 100 of the world’s most profitable multinationals being reallocated to the markets where those profits were generated, for tax purposes.
The new minimum 15-per-cent rate, the OECD said, would apply to companies with more than €750-million (US$868-million) in annual income, which it expects will deliver countries an additional US$150-billion in tax revenue each year.
“Today’s agreement will make our international tax arrangements fairer and work better,” OECD Secretary-General Mathias Cormann said in a statement. “… It is a far-reaching agreement which ensures our international tax system is fit for purpose in a digitalized and globalized world economy.”
The decision follows years of multilateral struggles over how to fairly tax the giants of global industry in the digital age. Physical offices or operations are no longer necessary for a company to do business in a country, which, thanks to outdated tax laws, has allowed for profits to be generated in some jurisdictions without being taxed locally.
The ephemeral nature of digital companies’ operations has also allowed them to establish major offices where they can minimize tax bills. Countries such as Ireland built significant portions of their economies by enticing businesses with low tax rates. The country agreed to join the agreement Thursday after the OECD changed language around the minimum tax rate from “at least” 15 per cent to just 15 per cent.
Pension funds and mining companies – both of which have a significant presence in Canada – are among the organizations exempt from the new OECD rules. “It looks like a country like Canada probably fares pretty well from this,” said Mark Warner, a Toronto-based competition, investment and trade lawyer who previously worked for the OECD.
The federal government had estimated that its proposed new digital-services tax would bring in $3.4-billion in revenue over five years, while the Parliamentary Budget Officer said it could bring in $4.23-billion.
Economist Toby Sanger of the Canadians for Tax Fairness advocacy organization said Friday’s deal gives tech giants “a gigantic tax break” in Canada, in comparison to the proposed DST.
“This proposal for taxation of large multinationals is definitely going in the right direction. It just needs to go much further,” he said in a written analysis of Friday’s agreement. The advocacy group, which has called for a crackdown on the use of tax havens, estimates large tech companies would face a tax bill in Canada under the OECD proposals that would amount to less than half of what would apply under the proposed DST.
Allan Lanthier, a retired partner of a major international accounting firm, said the 15-per-cent tax agreement “is a big deal,” but that it still faces hurdles before coming into force.
“The elephant in the room is the United States,” he said, because it is unclear whether U.S. President Joe Biden can secure congressional support for the plan.
Thousands of businesses that do not pass the €750-million annual revenue threshold would not be subject to the OECD’s new minimum 15-per-cent rate. But the group said that the scope of the plan could be expanded after seven years after the initial rules are implemented.
With some details of the OECD plan still to be worked out, it’s also not clear if large multinationals could somehow circumvent the rules through subsidiaries or affiliate companies. “We’ll have to see how they’re actually dealing with that, depending how all this is written up,” Mr. Warner said.
In an e-mailed statement, Facebook vice-president of global affairs Nick Clegg said that “the tax system needs to command public confidence, while giving certainty and stability to businesses. We are pleased to see an emerging international consensus.”
Google referred The Globe and Mail to a February, 2021, blog post by Karan Bhatia, its vice-president of global affairs. It stated that the company has “long supported efforts to update international tax rules.”
Apple did not respond to a request for comment.
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