More than 130 countries have forged a deal on sweeping changes in how big global companies are taxed.
The goal: deterring multinational companies from stashing profits in countries where they pay little or now taxes — better known as tax havens.
The sweeping agreement was struck on Saturday among 136 countries after talks overseen by the Organisation for Economic Cooperation and Development.
It would update a century's worth of international taxation rules to cope with changes brought by digitalisation and globalisation.
The most important feature: a global minimum tax of at least 15 per cent, a key initiative pushed by US President Joe Biden and Treasury Secretary Janet Yellen.
Yellen said the minimum tax will end a decades-long "race to the bottom" that has seen corporate tax rates fall as tax havens sought to attract corporations that take advantage of low rates — but do little actual business in those locations.
Here's a look at key aspects of the deal:
WHAT PROBLEM DOES IT ADDRESS?
In today's economy, multinationals are increasingly likely to earn profits from intangibles such as trademarks and intellectual property.
Those can be easy to move, and global companies can assign the earnings they generate to a subsidiary in a country where tax rates are very low.
Some countries compete for revenue by using rock-bottom rates to lure companies, attracting huge tax bases that generate large revenue even when tax rates only marginally above zero are applied.
Between 1985 and 2018, the global average corporate headline rate fell from 49 per cent to 24 per cent.
By 2016, over half of all US corporate profits were booked in seven tax havens: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore, and Switzerland. That costs the US Treasury US$100 billion (NZ$144 billion) a year according to one estimate.
HOW WOULD A GLOBAL MINIMUM TAX WORK?
The basic idea is simple: Countries would legislate a global minimum corporate tax rate of at least 15 per cent for very big companies, those with annual revenues over US$864 billion (NZ$1.244 trillion).
Then, if companies have earnings that go untaxed or lightly taxed in one of the world's tax havens, their home country would impose a top-up tax that would bring the rate to 15 per cent.
That would make it pointless for a company to use tax havens, since taxes avoided in the haven would be collected at home. For the same reason, it means the minimum rate would still take effect even if individual tax havens don't participate.
HOW WOULD THE TAX PLAN ADDRESS THE DIGITALISED ECONOMY?
The plan would also let countries tax part of the earnings of the 100 or so biggest multinationals when they do business in places where they have no physical presence. That could be through internet retailing or advertising. The tax would only apply to a portion of profits above a profit margin of 10 per cent.
In return, other countries would abolish their unilateral digital services taxes on US tech giants such as Google, Facebook and Amazon.
That would head off trade conflicts with Washington, which argues such taxes unfairly target US companies and has threatened to retaliate with new tariffs.
DOES EVERYONE LIKE THE DEAL?
Some developing countries and advocacy groups such as Oxfam and the UK-based Tax Justice Network say the 15 per cent rate is too low and leaves far too much potential tax revenue on the table.
And although the global minimum would capture some US$150 billion (NZ$216 billion) in new revenue for governments, most of it would go to rich countries because they are where many of the biggest multinationals are headquartered.
A 20 per cent to 30 per cent minimum was recommended by the UN's high-level panel on International Financial Accountability, Transparency and Integrity.
In a report earlier this year, the panel said that a rate that is too low can incentivise countries to lower their rate to remain competitive.
Countries that participated in the talks but did not sign the agreement were Kenya, Nigeria, Pakistan and Sri Lanka.
HOW WOULD THE AGREEMENT TAKE EFFECT?
The accord will go to the Group of 20 leaders. Agreement there is likely since all 20 members signed Friday's deal. Implementation then moves to the individual countries.
The tax on earnings where companies have no physical presence would require countries to sign up to an intergovernmental agreement during the course of 2022, with implementation in 2023.
The global minimum could be applied by individual countries using model rules developed by the OECD. If the US and European countries where most multinationals are headquartered legislate such minimums, that would have much of the intended effect.