Smoothly implement new global tax system following historic agreement

The Yomiuri Shimbun / The original Japanese article appeared in The Yomiuri Shimbun on Oct. 16, 2021.

14:00 JST, October 16, 2021

A final agreement has been reached on an international taxation framework to prevent multinational corporations from using tax shelters. There is great significance in reviewing the system in line with the changing times. The framework must be implemented smoothly in accordance with the agreement.

A total of 136 countries and regions, including all members of the Organization for Economic Cooperation and Development, have agreed on new rules for international taxation. A meeting of the Group of 20 finance ministers and central bank governors endorsed the framework at the ministerial level. It is said the participating parties aim to introduce it in 2023.

The main pillars of the framework are to set the minimum rate of corporate tax at 15% globally, and to create a “digital tax” that will require companies such as the U.S. tech giants dubbed GAFA to pay their fair share of taxes.

A tax system is an important sovereign power for each economy. Getting 136 economies to reach an agreement should be welcomed, even though it took nearly 10 years for the talks to happen.

Since the 1980s, governments have been competing to reduce corporate taxes in order to attract foreign companies. The new rules are a historic turning point that will put a stop to this trend. It is expected to increase tax revenue by ¥17 trillion per year worldwide.

In July, the participants reached a broad agreement and the level of the minimum tax rate was set at 15% or higher, but since the draft of the final agreement fixed the rate at 15%, Ireland and other countries with low tax rates have turned in favor of the draft.

It has been said that tech giants are trying to avoid taxation by shifting their profits to low-tax countries called tax havens. The introduction of a minimum tax rate is expected to deter such maneuvering.

Many governments have been driven to agree on the new framework by the rapid deterioration in their fiscal situation caused by measures taken against the novel coronavirus. Major countries are increasingly emphasizing redistribution to correct disparities, and there likely is a desire to secure financial resources.

Regarding digital taxation, on the other hand, the principle that a government cannot levy corporate taxes on companies that don’t have factories or other bases in the country will be changed drastically for the first time in about 100 years.

Tech giants have been using the internet to expand their businesses into countries where they do not have a base and are generating huge profits. It has been difficult to tax such companies properly.

The new system will cover companies with sales of more than €20 billion (about ¥2.6 trillion) and profitability above 10%, and it is expected about 100 companies will be subject to the new system worldwide. Countries where the company does not have a base will also be able to receive tax allocations based on sales in the respective country.

However, the implementation of the minimum tax rate is subject to legal revision in each country, and some countries may face difficulties in legislative deliberations. Digital taxation will require the creation of a multilateral treaty. Countries must continue to work together to ensure that this historic agreement leads to further development of the global economy.