(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

 

LONDON - Clinching a global deal to reform corporate taxation is a watershed moment. But the accord that was backed by 136 countries on Friday has strayed from its original purpose of updating the rules for the digital age. There are ways to fix that.

Nations that account for more than nine-tenths of global GDP signed up to an agreement that introduces a 15% minimum tax, with Kenya, Nigeria, Pakistan and Sri Lanka the only holdouts. The Organisation for Economic Co-operation and Development reckons the move will raise around $150 billion in additional tax revenue annually. But rich countries, which are home to the biggest multinationals, will benefit disproportionately.

Also, the part of the deal that’s supposed to redistribute digital taxing rights is unimpressive. It covers about 100 companies with more than 20 billion euros of annual revenue. They will owe tax in countries where their goods and services are consumed, but only on one-quarter of pre-tax profit above a threshold of 10% of revenue.

For Facebook, $10.5 billion - or 19% of pre-tax profit - is up for grabs, using Refinitiv 2022 estimates. The company attributed 53% of its most recent quarter’s revenue to users outside North America. The countries that refused to sign the deal would like to narrow the gap between those two numbers. They may find future allies in India and Europe, as digital behemoths will account for a growing share of economic activity in the coming years.

The easiest fix would be to adjust the thresholds so that more pre-tax profit flows to the countries where users are based. Friday’s accord incorporates a plan to reduce the revenue threshold to 10 billion euros over time, bringing more multinationals into the net. An even better solution would be to share out tax receipts according to where revenue is generated. This would mean that more than half of Facebook’s profit would be taxable outside North America.

The U.S. Treasury will have objections, even though the size of America’s market means it might extract more money from foreign giants like Nestlé and Unilever. And defining where sales are generated could be tricky. Holdouts will therefore have to wait to get what they want. But they are further forward than they were yesterday.

 

CONTEXT NEWS

- The Organisation for Economic Co-operation and Development on Oct. 8 said that 136 of 140 countries negotiating an overhaul of corporate taxation had backed plans for a minimum rate of at least 15% and a reallocation of some taxing rights over multinationals from their home countries to the markets where they generate revenue.

- The OECD, which has led the negotiations, said Kenya, Nigeria, Pakistan and Sri Lanka had not yet joined the agreement.

- The minimum rate will raise around $150 billion in additional global tax revenue annually for governments worldwide, the OECD estimated.

- The new taxing right will apply to companies with more than 20 billion euros of annual revenue and a pre-tax profit margin of more than 10%. One-quarter of companies’ pre-tax profit beyond the minimum 10% margin will be taxable in countries where their goods and services are consumed.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

(Editing by Swaha Pattanaik and Karen Kwok) ((For previous columns by the author, Reuters customers can click on PROUD/ SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS http://bit.ly/BVsubscribe | liam.proud@thomsonreuters.com; Reuters Messaging: liam.ward-proud.thomsonreuters.com@reuters.net))