Countries representing most of the global GDP have agreed to a minimum 15 percent tax on multinationals but the deal falls short of addressing concerns of the developing nations.
A total of 130 countries have agreed to a global tax reform ensuring that multinationals pay their fair share wherever they operate, but the deal falls short of addressing the concern of some developing countries.
The Organisation for Economic Co-operation and Development said on Thursday that global companies, including US behemoths Google, Amazon, Facebook, and Apple would be taxed at a rate of at least 15 percent once the deal is implemented.
The new tax regime will add some $150 billion to government coffers globally once it comes into force by 2023. However, most of the benefit of this global minimum tax goes to the rich countries.
"The framework updates key elements of the century-old international tax system, which is no longer fit for purpose in a globalised and digitalised 21st century economy," the OECD said.
The formal agreement follows an endorsement by the G7 group of wealthy nations last month, and negotiations now move to a meeting of the G20 group of developed and emerging economies on July 9-10 in Venice, Italy.
For decades large multinational companies have moved their profits to tax havens such as Ireland. In the digital era, the flight of profits increased as tech firms used the pretext of intellectual property to ferry away profits from the countries where the products or services are sold.
The main purpose of the minimum corporate tax is to ensure that companies pay a fair share of tax in countries where they sell products and services - not just where the headquarters is located.
The 130 countries that have backed the agreement represent more than 90 percent of global GDP. These countries include India, Pakistan, and Turkey.
New rules on where the biggest multinationals are taxed would shift taxing rights on more than $100 billion of profits to countries where the profits are earned.
The minimum corporate tax does not require countries to set their rates at the agreed floor but gives other countries the right to apply a top-up levy to the minimum on companies' income coming from a country that has a lower rate.
The Group of Seven advanced economies agreed in June on a minimum tax rate of at least 15 percent.
Some developing nations had lobbied for a much higher rate of more than 20 percent as corporate tax rate is already high in these countries.
“To force through such an unfair reform, giving the lion’s share of revenue to the largest OECD members when lower-income countries lose the greatest share of tax revenue to corporate tax abuse, is shocking," said Alex Cobham, the chief executive of Tax Justice Network, an organisation that lobbies for tax reforms.
"To do so during a global pandemic when the need for revenue to support public health, and economic recovery, is greater than ever, is unthinkable."
Companies covered under the deal would be multinationals with global turnover above $24 billion and a pre-tax profit margin above 10 percent, with the turnover threshold possibly coming down to $12 billion after seven years following a review.
Developing countries have asked for lowering that revenue threshold so more companies can be included in the scope of the deal. The African Tax Administration Forum had suggested that companies will a turnover of around $300 million should be considered.
Extractive industries such as mining companies and banks have been excluded from the rules on where multinationals are taxed.
But for many countries that depend on their natural resources to fund public spending it was the mining companies that have been a problem. Multinational miners use techniques such as transfer pricing to shift profits to low tax jurisdictions.
The new rules on where multinationals are taxed aims to divide the right to tax their profits in a fairer way among countries as the emergence of digital commerce has made it possible for big tech firms to book profits in low tax countries regardless where they money was earned.
EU low-tax countries Ireland and Hungary declined to sign up to the agreement.
Ireland, the EU home to tech giants Facebook, Google and Apple, has a corporate tax rate of just 12.5 percent.