The global tax deal that was agreed by more than 130 countries in October 2021 has sparked uncertainty for US companies that operate abroad. The deal aims to prevent multinational corporations from shifting their profits to low-tax jurisdictions and to ensure that they pay their fair share of taxes in the countries where they have customers and sales.
The deal consists of two pillars: one that reallocates some of the taxing rights from the countries where the companies are headquartered to the countries where they have markets, and another that sets a global minimum tax rate of 15 percent for large companies with annual revenue of more than 750 million euros ($866 million).
The first pillar, known as Amount A, would affect about 100 of the most profitable companies in the world, many of which are US-based technology giants like Amazon, Facebook and Google. These companies would have to pay taxes in countries where they have users or consumers, even if they do not have a physical presence there. The OECD estimates that this pillar would redistribute more than $125 billion of profits annually.
The second pillar, known as Amount B, would apply to all companies with revenue above the threshold, regardless of their profitability or industry. These companies would have to pay at least 15 percent tax on their foreign earnings, regardless of where they are booked. If a company pays less than that in a jurisdiction, its home country would have the right to top up the difference. The OECD estimates that this pillar would generate around $150 billion in additional global tax revenue per year.
The US already has its own form of global minimum tax, which it applies to the foreign profits of American companies. To comply with the agreement, Congress will have to raise that tax rate from 10.5 percent to at least 15 percent and switch to the country-by-country system. However, this could face opposition from Republicans, who have criticized the deal as a surrender of US sovereignty and a disadvantage for US businesses.
The global tax deal also raises questions about how it will interact with existing bilateral tax treaties, how it will be enforced and monitored, and how it will affect the competitiveness and innovation of US companies. Some experts have warned that the deal could create new complexities and uncertainties for businesses and tax authorities. Others have argued that the deal could benefit US companies by creating a more level playing field and reducing the risk of double taxation.
The global tax deal is expected to be finalized by mid-2023 and implemented by 2024 at the earliest. Until then, US companies will have to wait and see how the details of the agreement will affect their operations and tax bills.