One hundred and thirty countries and regions, including member countries of the Organization for Economic Co-operation and Development (OECD), agreed on July 1 on a proposal to regulate corporate taxation. They set the overall minimum rate at “at least 15%”.
Targeting large companies in information technology, the digital tax would apply to companies with “a turnover of more than 20 billion euros and a profit margin of 10%”. Worldwide, this will include around 100 companies.
A final deal spelling out the details will be reached by October 2021, with the goal of introducing the tax regime in 2023. As a result, competition to excessively reduce corporate taxes will be halted, and large IT companies will stop. increasingly criticized for tax evasion, will have to bear an appropriate share of the tax burden.
This agreement will be a major turning point in the reform of international corporate taxation. Regular implementation is therefore essential. Countries should quickly design a detailed implementation system and step up efforts to include low-tax countries, such as Ireland, which have not accepted the proposal.
Corporate tax rates have been falling for more than 30 years in the wake of economic globalization, countries are hoping to attract successful businesses. However, in response to the COVID-19 pandemic, many countries have increased their budget spending. Reducing tax breaks for businesses has become a key factor in securing tax revenues.
It is significant that the major countries of the world, although they may have divergent interests, are cooperating to adopt corporate tax reforms in response to the new era.
It is often pointed out that large IT companies are moving their headquarters to tax havens in order to evade higher taxes. Encouraging these companies to assume their social responsibilities by requiring them to pay an appropriate share of the tax burden will also lead to a correction of some disparities.
For these reasons, participating countries should hold in-depth discussions and reach a final agreement for its regular implementation.
Even in countries where the official corporate tax rate is 15% or more, it can be expected that there are cases where a company wants an exception in the form of a lower rate. It is imperative that the system is designed in such a way that there are no loopholes. A mechanism to investigate the effective corporate tax rate in each country should also be considered.
Of the 139 countries that took part in the talks, nine – including Ireland, Hungary and Estonia – did not accept the proposal.
While there are countries that function as exceptions to the agreement, the effectiveness of the new tax rate cannot be guaranteed. To avoid this, it is important that all countries come together to strongly encourage participation.
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(Lily The Sankei Shimbun editorial in Japanese on this link.)
Author: editorial board, The Sankei Shimbun