On Friday, Hungary, one of the last remaining holdouts in a group of more than 130 nations, announced that it would agree to adopt a 15 percent global minimum tax rate, giving momentum to an effort to implement the largest overhaul of the international tax system in a century.
Years of tense negotiations were reignited this year after President Biden took office and reaffirmed America’s commitment to multilateralism. A deal is expected to be announced later on Friday. As the agreement nears completion, finance ministers hope to reverse a decades-long race to the bottom of corporate tax rates that has drained countries of the revenue they need to build new infrastructure and combat global health crisis.
Hungry and two other countries that had refused to support the deal because they feared it would harm their economies have now signed on. Prior to Hungary’s announcement, Ireland and Estonia, two key holdouts, approved the agreement.
It was the Organization for Economic Cooperation and Development (OECD) in Paris that presided over the talks.
As part of the agreement, the United States proposed a 15 percent minimum corporate tax rate and rules requiring global technology giants like Amazon and Facebook to pay taxes in countries where their goods or services are sold, even if they have no physical presence there.
According to the agreement, the world’s largest corporations will be taxed in a new way, with more money going to the countries where they do business, as well as more money going to the countries where they don’t. Profits have traditionally been taxed based on where a company has a physical presence.
As it will take time for countries to change their tax laws and for international tax treaties to be updated, the agreement has been set a target date of 2023.
When the United States agreed to accept a minimum tax of at least 15% rather than the 21% it had sought in May of last year, the sputtering negotiations gained momentum.
During the summer, negotiators met at international forums to discuss possible exceptions, a timetable for implementation, and the enforcement of the agreement once it was put into effect.
Many people wondered how the EU would persuade countries like Ireland and Estonia whose economies are built on low tax rates to join the union. The agreement cannot be implemented unless there is complete agreement across the European Union.
The agreement is now on its way to becoming a reality with the addition of those three countries.
It was only after Prime Minister Viktor Orban held out for better terms to ensure that Hungary’s economy would not lose its competitive edge that the country agreed to sign on to the agreement.
Hungry has long made an investment-attractive offer of a 9.5% corporate tax rate. Rather than the five years originally proposed, it wrested an exemption that would allow multinationals to reduce profits subject to minimum tax for a transition period of 10 years.
Mihaly Varga, Hungary’s Finance Minister, said, “We have reached a breakthrough on the global minimum tax deal.”. “As a result, Hungary could join the agreement with a good heart.”
When it became clear that smaller companies with annual revenues below 750 million euros would not be subject to the new, higher tax, Ireland changed its mind. A draught O.E.C.D statement was changed to remove the word “at least” as a result, ensuring that the minimum tax would not be increased.
In a statement on Thursday, Ireland’s finance minister, Paschal Donohoe, said, “I am satisfied that Ireland’s interests are better served within the agreement from my contact and negotiation with international stakeholders in Europe, the United States, and beyond.
And on Thursday, Estonia announced its support for the deal, after resolving concerns that a minimum tax would harm the country’s entrepreneurs.
At a summit in Rome later this month, G20 leaders are expected to sign off on a deal that was reached by finance ministers from the world’s 20 largest economies.
There will be a long road ahead to make the pact work so that governments can begin to collect the taxes they say they desperately need to help revitalise their economies in the wake of the Pandemic.
Legislation must be passed by Congress to ratify any agreement, and European governments are keeping an eye on the situation to see whether President Biden can accomplish this.