This floor under corporate tax will come to power in 2023.
Time has finally come! Lately, most of the world's nations have agreed for big companies to start paying corporate taxes. In addition, 136 countries signed up to a historical contract that enforces a corporate tax rate of 15% to create a fairer system of taxing profits. Really? The whole world came together to agree only on 15%?! Critics and reports still suggest that these newly set tax rates are too low. Besides, firms will most likely get around these new taxing rules as quickly as they come into power.
Oxfam predicts that a 15% tax rate is a joke and would do "nearly nothing to end the damaging tax competition that exists today." Instead, the organization says that multinational companies should pay 25% at the very least, no matter the country in which they are registered. UK Chancellor Rishi Sunak, on the other hand, claimed that this national agreement would help modern-day society because, in the end, it is still somewhat of an upgrade in the global tax system. He said: "We now have a clear path to a fairer tax system, where large global players pay their fair share wherever they do business."
Well, it's not precisely that fair of a deal considering these companies make billions of dollars annually, but hey, you have to admit, it is a small step to a fairer world! Plus, according to The Organization for Economic Cooperation and Development (OECD), this new tax agreement will bring an extra $150 billion of tax annually, strengthening economies all over the world after their experienced downfall from the pandemic.
The damaging tax competition
The agreement is expected to affect global digital giants such as Google, Facebook, and Amazon. It will also affect other firms that reach over $23 billion in annual profit and reach profit margins of 10%. A quarter of any additional profit these firms make above the 10% threshold will be transferred to the country they are registered as a business.
But how exactly were these multinational companies paying their taxes in the past? They had to register as a business somewhere and pay some taxes, right? Although that is true, before this tax agreement, countries were competing with each other on who could offer the lowest deals to multinationals. Take, for example, countries in Eastern Europe like Bulgaria, Croatia, Albania, etc. These locations are packed with foreign companies that set up their factories there and create more job opportunities for the locals. Moreover, since these countries are still developing, they offer lower tax rates for multinationals to register their business and create jobs. So, it's a win-win situation for both parties.
But things can't continue like this anymore. And the reason why is because new digital companies are taking power. They have become masters at moving their company profits to places that are known as tax havens. Until now, these countries were a nightmare to the global economy as they managed to "save" these digital companies from paying billion dollars of tax. So, the world finally came together to put a stop to this.
Countries that refused this at first
This new system will minimize the damaging tax competition today by limiting profit shifting and ensuring that big businesses pay at least some taxes in the country that they have decided to open their business.
Ireland, Estonia, and Hungary (which have tax rates below 15% for multinational businesses) refused to sign the contract at first. However, it didn't take long for them to hop on board with other countries that had already agreed. Countries that are currently resisting signing the agreement are Nigeria, Kenya, Sri Lanka, and Pakistan.
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