Steps Towards Fairer Taxes, OECD Reveals Draft Agreement

The Organization for Economic Cooperation and Development (OECD) has recently published a draft agreement aimed at regulating a fairer distribution of income tax on profits earned by large multinational corporations. Global giants, especially in the technology sector, have been able to easily shift their profits to countries with low tax rates, even when they conduct only a fraction of their operations there.

This initiative has garnered widespread support, with nearly 140 countries taking the initial steps toward reaching an agreement on this draft. However, despite its publication, the OECD states that the agreement is not yet open for signing due to concerns from certain nations, including India, Brazil, and Colombia.

Manal Corwin, the director of the OECDs Center for Tax Policy and Administration, has noted, "There is very broad consensus on most of the draft text among the 140 jurisdictions involved." The goal is to have this agreement signed by the end of the year.

Corwin also warns that if this agreement is not enforced, there is a risk of unilateral national taxes on digital services that could "threaten the stability of the international system." Therefore, this agreement is of great significance in maintaining balance and fairness in terms of tax payments by multinational companies.

Under the provisions of this draft agreement, large multinational corporations would be required to pay a portion of their taxes in the countries where their clients are based, regardless of their country of operation. However, this policy will only apply to the largest companies with a global turnover exceeding 20 billion euros ($21 billion), affecting around 100 companies in total.

If this agreement is adopted, additional taxes will be distributed proportionally among the countries where these companies generate a minimum of one million euros in revenue. In total, approximately $200 billion is expected to be redistributed each year, with additional tax revenues ranging from $17 billion to $32 billion, according to the OECD.

In 2021, during negotiations led by the OECD, an agreement was reached on a minimum tax rate of 15 percent for multinational corporations. These negotiations also covered the development of regulations for imposing taxes on multinational corporations to prevent countries from suffering losses due to profit shifting.

However, negotiations to solidify the tax formula for multinational corporations have been progressing slowly. The draft agreement must still be signed by individual countries and ratified in their national parliaments. To come into effect, this agreement must be adopted by at least 30 countries, where at least 60 percent of multinational companies operate. Currently, almost half of these companies are based in the United States.

However, President Joe Biden is currently facing challenges in gaining sufficient support in Congress to ratify the agreement, which has created significant uncertainty about its future. Based in Paris, France, the OECD is an international organization consisting of 38 member countries, primarily focused on economic and tax policy.