On October 8th negotiations at the OECD ended with an international agreement to set a minimum tax rate of 15% for large multinational enterprises from 2023.

The deal builds on a preliminary agreement announced by the G7 countries and contains two main pillars. The first introduces the new minimum tax rate, which will be levied on all companies with revenue exceeding US$750m. The second provides for fairer distribution of tax receipts from multinational enterprises earning more than 10% profit on sales of more than US$20bn a year. The 136 countries that signed the new arrangement include the entire G20 and the OECD. Only a few developing economies (such as Kenya, Nigeria, Pakistan and Sri Lanka) abstained.

Brokering the agreement, which has been under negotiation for years, required offering a host of concessions to several countries. For example, Ireland agreed to join only after securing commitments that the minimum tax would be capped at 15%; the administration of Joe Biden, the US president, had originally proposed a 21% minimum.

To secure the OECD agreement, the negotiating countries suspended collection of digital services taxes (DSTs), and the US halted its trade investigations against these countries. The deal is expected to become effective from 2023, once it has passed the different national legislatures. The US Congress is likely to see the most debate, given Republican opposition to tax rises, but low-tax countries such as the Netherlands and Estonia may also encounter internal opposition. Delayed implementation could prolong DSTs on US tech companies and spark fresh trade disputes between the US and the EU.

The main question for the US is whether Congress will ever agree to the deal. The US Treasury secretary, Janet Yellen, has proposed recently that the global minimum tax could be passed as part of the ongoing budget reconciliation process. However, all treaties signed by the executive require the approval of two-thirds of the Senate (the upper house of Congress), which remains evenly divided between Democrats and Republicans, and therefore the deal seems extremely unlikely to be passed in the short term.

Impact on the forecast

If somehow implemented, the OECD agreement would provide a short-term boost to tax revenue at a time when the Biden administration is trying to finance massive spending proposals. As for US tech companies, although having a global agreement avoids the fragmentation of different national rules, they are likely to pass on the extra costs to consumers.