The Organization for Economic Cooperation and Development (OECD) has announced that Ghana and some 135 countries representing over 90 per cent of International GDP have agreed to enforce a corporate tax rate of at least 15 per cent, as well a fairer system of taxing profits where they are earned.
This follows the concern that multinational companies are shifting their profits through low tax jurisdictions. However, critics say a 15 per cent rate is too low, and firms will get around the rules.
UK Chancellor Rishi Sunak said the deal would “upgrade the global tax system for the modern age. We now have a clear path to a fairer tax system, where large global players pay their fair share wherever they do business.”
Meanwhile, only four countries did not join the deal: Kenya, Nigeria, Pakistan and Sri Lanka who are part of countries who meet global financial standards.
The OECD indicated the deal could bring in an extra $150bn (£108bn) of tax a year, bolstering economies as they recover from Covid. However, it also said it did not seek to do away with the tax competition between countries, but only to limit it.
This global action which is expected to hit digital giants like Amazon and Facebook— will affect firms with global sales above 20 billion euros (£17bn) and profit margins above 10%.
A quarter of any profits they make above the 10% threshold will be reallocated to the countries where they were earned and taxed there.
“[This] is a far-reaching agreement which ensures our international tax system is fit for purpose in a digitalised and globalised world economy,” opined OECD Secretary-General Mathias Cormann.
“We must now work swiftly and diligently to ensure the effective implementation of this major reform.”Mathias corman
Pact to End the race to the bottom on corporate taxes
This new system is meant to minimise opportunities for profit shifting, and ensure that the largest businesses pay at least some of their taxes where they do business, rather than where they choose to have their headquarters.
With this number of countries agreeing to the pact, this marks a big achievement in itself. But this also means there will be losers as well as winners.
Thus, both developed and developing economies will now have to compete on the skills sets of their people, which obviously is a condition that developing economies are woefully lagging.
US Treasury Secretary Janet Yellen is cited to have said: “…Virtually the entire global economy has decided to end the race to the bottom on corporate taxation.
“Rather than competing on our ability to offer low corporate rates, America will now compete on the skills of our workers and our capacity to innovate, which is a race we can win.”Janet Yellen
However, Oxfam has said a 15 per cent tax rate is too low and would do “little or nothing to end harmful tax competition”. It believes firms should pay at least 25 per cent wherever they are based.
In July 2021, its international executive director Gabriela Bucher said: “[The 15% rate] is already being seen by some in Australia and Denmark as an excuse to lower domestic corporate tax rates, risking a new race to the bottom.”
Whether Ghana would emerge as among the winners by having to reduce its corporate tax from 25 per cent to 15 per cent beginning from 2023 is uncertain. But one thing is for sure, this would affect the government’s medium term revenue projections, before perhaps any benefits can reel in.