International Tax Agreement: Establishing Fair Distribution

International taxation rules will see the first major reform in 100 years.

Last week, the Organisation for Economic Co-operation and Development announced the introduction of a “digital tax” to prevent tax evasion by multinational corporations like IT giants. They also announced an agreement between 136 countries and regions to strengthen international taxation with a minimum tax rate of 15%.

It is expected to be confirmed at the Group of 20 Finance Ministers and Central Bank Governors’ Meeting held on Oct. 13. The taxation plans are scheduled to go into effect in 2023.

These reforms should be welcomed because they will “ensure that profitable corporations pay their fair share, and provide governments with the resources to invest in their workers and economies,” according to United States President Joe Biden.

The digital tax is a system in which businesses without physical locations such as office buildings or stores can be taxed in countries or regions in which the business’s users are located.

This system would change the present situation, in which corporations such as American tech giants Google, Apple, Facebook and Amazon make huge profits, but do not pay the corresponding amount in taxes.

The tax program targets multinational companies with worldwide sales exceeding 2.6 trillion yen (approximately $22.8 billion). Such companies with a profit ratio that exceeds 10% will be subject to the new rules with 25% of the profit above the 10% threshold to be reallocated in proportion to the sales in each country.

The establishment of a minimum tax rate of 15% is an effort to stop competition to lure in businesses by lowering taxation as well as making it difficult to evade taxes.

Both of these efforts seek to address taxation deficiencies and differences in taxation between countries, as well as pursue equality in international taxation.

Hopefully, these reforms will proceed steadily.

The agreement was able to be reached because countries such as the United Kingdom and France abolished their respective independently established digital tax policies, and because Ireland agreed to raise its minimum corporate tax from 12.5% to the agreed 15%.

So to speak, these reforms are the product of compromise from each nation involved.

A multinational treaty will be signed to confirm implementation, but there are rumors that there will be resistance from some nations’ domestic approval process.

Regarding the United States, whose IT giants are a target of the reforms, experts point out that “if ratification in Congress takes time, implementation of a digital tax may not be possible.”

Careful steps should be taken to achieve a realization of this agreement.