How will the global minimum tax rate work?

World leaders struck a landmark deal last week to make it more difficult for multinational corporations to evade taxation and ensure big companies pay a minimum rate of 15%. 

The Organisation for Economic Cooperation and Development announced Friday that 136 countries and jurisdictions accounting for more than 90% of the global economy had agreed to the deal. Only four countries – Kenya, Nigeria, Pakistan and Sri Lanka – abstained from joining the agreement.

"Today’s agreement will make our international tax arrangements fairer and work better," Mathias Cormann, OECD's secretary general, said in a statement. "We must now work swiftly and diligently to ensure the effective implementation of this major reform."

The deal is designed to target corporations that employ a litany of tactics to reduce their tax liability, often by shifting profits, and revenues, to low-tax countries, such as Bermuda, the Cayman Islands or Ireland, regardless of where the sale was made. The practice by American and foreign multinationals costs the U.S. tens of billions of dollars each year, according to the Treasury Department.  

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Negotiations, which have lasted for years, were bolstered by the support of President Biden and Treasury Secretary Janet Yellen as well as the unprecedented costs of the COVID-19 pandemic. 

The OECD estimated the agreement will reallocate $125 billion of profits from around 100 of the world's largest and most profitable multinational corporations to countries worldwide thus "ensuring that these firms pay a fair share of tax wherever they operate and generate profits."

The breakthrough came one day after Ireland, a beneficiary of low corporate tax rates, agreed to drop its opposition to the deal once some changes were made to the original text, including an assurance that the 15% rate will not be raised at a later date. The minimum rate also excludes companies with annual turnover below 750 million euros, or about $866 million. 

The OECD has pushed for years to eliminate corporate strategies "that exploit gaps and mismatches in tax rules to avoid paying tax." The global minimum tax would apply to companies' foreign earnings, meaning that governments could still establish their own corporate tax rate at home. 

A second part of the tax deal would allow countries where revenues are earned to tax 25% of the largest multinationals' "excess profit," or profit that's in excess of 10% of revenue. 

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By getting all countries to agree to a minimum corporate tax rate, the Biden administration is seeking to eradicate certain tax havens without hurting the competitiveness of American firms. Yellen said Friday the global tax, which would apply to companies' overseas profits, will eliminate what she's described as a "global race to the bottom" in terms of corporate taxes.

From here, the deal will be presented to finance ministers from the group of 20 to formally endorse it, clearing the way for G20 leaders to approve it at their summit in Rome at the end of October.

Countries are expected to make the agreement law by 2022 so that the tax can go into effect by 2023.

In the U.S., updating the tax law will require legislative approval by Congress – a feat that still faces an uphill trek to passage. The House and Senate will need to pass a bill raising the minimum tax on companies' overseas profits to 15% from the current rate of 10.5%. Democrats are planning to include the increase as part of their mega party-line tax-and-spending bill that will be passed using a procedural tool known as reconciliation, allowing the party to bypass a 60-vote filibuster by Senate Republicans. 

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Biden lauded the agreement Friday, celebrating it as "proof that the rest of the world agrees that corporations can and should do more to ensure that we build back better." He promised that the $3.5 trillion bill – the bulk of his "Build Back Better" economic agenda – would build on the OECD's deal.

"For decades, American workers and taxpayers have paid the price for a tax system that has rewarded multinational corporations for shipping jobs and profits overseas," Biden said in a statement. "This race to the bottom hasn’t just harmed American workers, it’s put many of our allies at a competitive disadvantage as well."