Canada among 130-nation deal to overhaul global corporate tax rules

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After years of negotiations, the United States, Canada and 128 other countries have announced a new global pact to overhaul the way large multinational companies are taxed.

The agreement includes a proposed global minimum corporate tax rate of 15 per cent and is aimed at curbing the use of tax havens and creative accounting that governments have long flagged as a cause for concern.

The participating countries say parts of the agreement will take effect in 2022 and the remaining elements will apply as of 2023. The statement released Thursday by the Organization for Economic Co-operation and Development (OECD) is a five-page summary. It says a detailed implementation plan that addresses “remaining issues” will be finalized by October.

However, Ireland, a low-tax country, and eight others involved in the talks declined to sign on.

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U.S. Treasury Secretary Janet Yellen has pushed hard for a deal this year, stating it is time for governments to stop the “race to the bottom” of steadily lower corporate tax rates in the hunt for investment. The talks are driven by concern that a loss of corporate tax revenue is eroding tax bases and limiting the ability of governments to fund core services.

“Today is an historic day for economic diplomacy,” Ms. Yellen said in a statement Thursday. “For decades, the United States has participated in a self-defeating international tax competition, lowering our corporate tax rates only to watch other nations lower theirs in response. The result was a global race to the bottom: Who could lower their corporate rate further and faster? No nation has won this race. Lower tax rates have not only failed to attract new businesses, they have also deprived countries of funding for important investments like infrastructure, education and efforts to combat the pandemic.”

The joint statement released Thursday said the new agreement will include a new minimum corporate tax rate of 15 per cent. It also proposes a range of formulas for measuring when and how a company would be subjected to the new rules. The changes are aimed at removing incentives for companies to create complex global accounting structures to help pay less tax. U.S. President Joe Biden proposed a 15-per-cent minimum tax earlier this year.

The worldwide average statutory corporate income tax rate is 23.85 per cent, according to 2020 data from the Washington-based Tax Foundation. The foundation lists Ireland’s 2020 rate at 12.5 per cent and Canada’s at 26.47 per cent. It also says the worldwide average corporate tax rate has consistently decreased since 1980.

The talks on “base erosion and profit shifting” have been under way for years, led by the Group of 20 and the OECD. They continued in June during in-person meetings of Group of Seven leaders.

The talks have focused on two related areas. “Pillar one” discussions relate to new rules for the digital economy that aim to better align taxation to the location of sales, rather than the physical location of a company’s headquarters. “Pillar two” talks are about new approaches to corporate taxation, including a minimum tax rate. The deal outlined Thursday covers both pillars.

In the federal Liberal government’s fall economic update, Finance Minister Chrystia Freeland announced that Canada would move ahead with a 3-per-cent tax on revenues collected from Canadian users by large online companies as of Jan. 1, 2022, if no international deal is reached on digital taxation.

Canada’s plan to potentially go it alone has faced criticism from U.S. Trade Representative Katherine Tai.

April’s federal budget estimated that this proposed new digital-services tax (DST) would collect $3.4-billion in new federal tax revenue over five years. The Parliamentary Budget Officer released analysis in May that estimated the tax would bring in $4.23-billion.

Ms. Freeland and Ms. Yellen held a virtual meeting Thursday to discuss the negotiations and prepare for coming G20 talks.

Ms. Freeland issued a statement Thursday afternoon that welcomed the OECD announcement as a “tremendous achievement,” but she did not commit to immediately abandon plans for a Canadian DST.

“This international agreement is good for Canadian workers and Canadian businesses, and it will ensure a fair and level playing field for them in the global economy,” she said. “Our government will continue to be focused on Canada’s national economic interests in negotiations with our international partners, including at next week’s meeting of G20 finance ministers.”

The 130 participating countries say they represent more than 90 per cent of global GDP.

But not all of the countries involved in the discussions signed on to Thursday’s document.

The government of Ireland, which has frequently butted heads with the U.S. over the way Ireland’s low corporate tax rates are used by U.S. tech multinationals, is among nine countries that did not sign.

Ireland’s Finance Minister Paschal Donohoe released a statement Thursday expressing his country’s “broad support” for parts of the agreement, “but noting our reservation about the proposal for a global minimum effective tax rate of ‘at least 15 per cent.’ As a result of this reservation, Ireland is not in a position to join the consensus.”

Mr. Donohoe also said he is committed to the process and will work toward a final agreement Ireland can support.

“There is much to finalize before a comprehensive agreement is reached in October. Ireland will constructively engage in these further discussions and technical work over the coming months,” he said.

The other countries that did not sign Thursday’s deal are Barbados, Estonia, Hungary, Kenya, Nigeria, Peru, Saint Vincent and the Grenadines, and Sri Lanka.

Allan Lanthier, a retired partner of a major international accounting firm, told The Globe and Mail Thursday the celebratory words from political leaders may be premature.

“This is the continuation of a process that has been in the works for several years, and I am not sure that the finish line is really in sight,” he said. “But if agreement is ever reached on a final package, there will certainly be an impact on Canadian-based multinationals.”

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