A total of 130 countries have reached a US-backed pathbreaking international framework for taxing multinationals at 15 per cent global minium tax and could end potential trade wars over the taxing of tech giants.

These countries - that included India, China and Switzerland - issued a joint statement on Thursday affirming support for the proposed framework which has at its core a global minimum corporate tax of 15 per cent and makes way for countries to tax multinational enterprises (MNEs), especially tech giants like Google, Facebook and Amazon, on their earnings there.

The 130 countries that agreed to the framework include members of the OECD and all members of the G20, Forbes said. 

“It would re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there,” said the Organisation for Economic Cooperation and Development (OECD), which coordinated the development of the plan.

It “will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs, including digital companies,” the OECD said.

The deal has two parts – or “pillars,” as the OECD calls it.

The first ensures the rights of countries to tax the MNEs on their incomes there.

The OECD said, “Under Pillar One, taxing rights on more than $100 billion of profit are expected to be reallocated to market jurisdictions each year.”

The second pillar sets the global minimum for taxes at 15 per cent without a ceiling on the maximum.

With a minimum rate of at least 15 per cent, it “is estimated to generate around USD 150 billion in additional global tax revenues annually,” the OECD said.

India and the US are embroiled in a dispute over New Delhi imposing a two per cent tax on earnings in the country by American technology and e-commerce companies like Amazon, Facebook and Google.

Biden's administration retaliated with a threat to raise import duties on a range of imports, from prawns and Basmati rice to furniture and jewellery, but kept it in abeyance hoping the new global tax framework could resolve it.

The OECD, which said that it expected the framework to be finalised in October for implementation in 2023, estimated that it would generate additional annual global tax revenues of around $150 billion that will be shared by various countries.

“Additional benefits will also arise from the stabilisation of the international tax system and the increased tax certainty for taxpayers and tax administrations,” the OECD said.

The framework got the approval of the G7 leaders last month and is expected to come up at the meeting of the finance ministers of the G20 group of major economies in Venice next week.

Biden and his Treasury Secretary Janet Yellen propelled the negotiations for the framework with the goal of preventing US companies fleeing to countries like Ireland, Hungary and Lichtenstein and those in the Caribbean region with lower corporate taxes.

Notably, most of those countries did not sign the statement agreeing to the framework.

In hopes that at least the major low-tax countries would fall in line, Yellen said, “Today is a historic day for economic diplomacy. For decades, the United States has participated in a self-defeating international tax competition, lowering our corporate tax rates only to watch other nations lower theirs in response. The result was a global race to the bottom.”

“Today’s agreement by 130 countries representing more than 90 per cent of global GDP is a clear sign: the race to the bottom is one step closer to coming to an end,” she said.

According to an analysis of the implications for India by the professional services company Dezan Shira & Associates in India Briefs, “India will be able to tax large MNCs (multinational corporations) doing business in the country – without a physical presence or permanent establishment – at 20 per cent of their profits (exceeding a 10 per cent margin).”

“Thus, the measure, if globally approved, will impact digital companies in whichever markets they earn revenues and make profits based on their online presence,” it said, adding that “however, the G7 countries have also called for the elimination of the digital services tax or equalisation levy.”

The equalisation levy is the two per cent tax India imposed on the tech giants that has led to the dispute with the Biden administration.

Explaining the need for the framework, OECD said, “Recent, rapid and expansive digital transformation has had deep economic and societal impacts resulting in significant changes. This has sparked global debates in many legal and regulatory realms and international tax is no different.”

It seeks to find a solution to the issue of “whether international income tax rules, developed in a 'brick-and-mortar' economic environment more than a century ago, remain fit for purpose in the modern global economy.” (SAM)