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Today there are some headlines that G7 countries and a lot of others decided to go with a global minimum corporate income tax of 15% (for companies of a certain size only).

The way they want to execute it, as I understand it from the news, is that if e.g. a company moves its income to its subsidary located in a foreign low-tax country with e.g. 10%, then the country of the company head office can claim from the company the difference to the global minimum which would be e.g. 5% difference. A result would be extra tax income for the US from companies like Apple or Google which are located in Ireland which has a corporate income tax below 15%.

Now my question: Why does this require an international agreement?

The US (and other countries in favor of this setup) could make a national law just asking for the difference. Irelands agreement is not needed and not required at all. Furthermore, Irish companies can still go with their home country's low tax (well below the "global minimum") and would even gain a competetitive advantage.

Or did I misunderstand something here?

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  • This is more politics than law (in fact I jl mind of remember a similar question) but the main issue is that if there is no agreement corporations will move to tax havens, leading to a "race to the bottom" as each country tries to "outbid" the others.
    – SJuan76
    Jul 2 at 14:54
  • If there is no agreement, a country could still introduce a local tax law to get the difference of what "their" company is paying via foreign subsidy in a low-tax-country.
    – UweD
    Jul 2 at 15:04
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A result would be extra tax income for the US from companies like Apple or Google which are located in Ireland which has a corporate income tax below 15%.

This doesn't follow. The U.S. already taxes U.S. corporations on their global corporate income at the full 20% rate now in force, subject to a tax credit for corporate taxes paid by that corporation in the country where it is earned.

To oversimplify, the issue in the scheme you refer to is that the Irish company that owns the intellectual property and is earning the income from licensing isn't a U.S. company and has no U.S. operations (as that is defined for tax purposes). So, the Irish company isn't subject to U.S. taxes as currently written. Instead, the non-U.S. company that owns most of the value of these tech firms (i.e. their intellectual property) are paid licensing fees by the U.S. operating companies to use that intellectual property.

Intellectual property income is deemed earned where its owner is located, in this case, in low tax Ireland. Until the non-U.S. company pays the U.S. company the money (e.g. as a dividend if it is a subsidiary of a U.S. company, although, in practice, it is more complicated than that), this income is not subject to U.S. taxation and it is only subject to U.S. corporate taxation when received by the U.S. corporation.

Some of this is a product of U.S. tax law (which, while having loopholes, is still atypically broad; most developed countries do not tax the worldwide income of their corporations, and instead tax only the earnings of their corporations in their own country even though this had become problematic in the case of "hot assets" like intellectual property and financial instruments that have spawned inconsistent piecemeal exceptions to the territorial taxation concept that most countries use, and the treaty would move the rest of the world closer to the U.S. system). But some of the rules, like an agreement on where income from licensing intellectual property is taxed is also the product of tax treaty agreements, mostly on a country by country basis.

But, if Ireland sees that somebody is going to immediately get tax revenues from the licensing money anyway, however, Ireland might be encouraged to increase its corporate income tax rate to 15% which makes this form of tax deferral by U.S. companies much less attractive than it is now.

This isn't the only way that this particular loophole in the tax law could be fixed, however. Congress could also, for example, change its rules regarding the location of income earned from intellectual property for tax purposes, or disallow deductions for licensing fees owned by related parties, even if this would violate U.S. tax treaties. But unilaterally dropping out of international tax treaties, while constitutionally possible in the U.S., would generate a diplomatic uproar that would create its own set of serious problems, just to fix a tax loophole. This might be more trouble than it is worth.

Now my question: Why does this require an international agreement?

While it isn't necessary to do this, there are still a couple of reasons to do so.

One is that many developed countries have tax treaties with each other that lock in the status quo, and an international agreement would provide a way for the status quo regime to be discarded in favor of a better system.

If everyone does this at once, it makes the transition from one tax regimes to another for certain kinds of corporate income less chaotic and disruptive and prevents needless competition and friction between countries whose citizens have high volumes of business transactions with each other.

it also provides signatory countries with the political push to get a technical and complicated issue that has low salience with their domestic voters, even though it is important, acted upon.

And, doing it all at once in a comprehensive treaty also allows multinational businesses and their professional advisors to learn just one streamlined rational set of rules, instead of many inconsistent sets of rules that could be gamed and arbitraged against each other to avoid taxation by taking advantage of the inconsistencies, which is basically how many current international tax reduction strategies work right now.

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