TOKYO -- A total of 136 countries and jurisdictions agreed Friday to adopt a 15% global minimum corporate tax rate from 2023 and let countries collect taxes from multinational enterprises that offer services within their borders even without a physical presence there.
The agreement on the tax reform framework was announced by the Organization for Economic Cooperation and Development, which has coordinated the talks. Those countries and jurisdictions that signed on represent more than 90% of global gross domestic product, according to the OECD.
The deal marks a milestone in efforts to hit the brakes on a three-decades-plus global race to the bottom in corporate taxes.
The move to allocate tax revenue based on areas of operation rather than physical infrastructure for certain big companies -- a response to an increasingly global and digital economy -- upends one of the concepts underpinning the century-old international tax system.
This measure will "reallocate more than USD 125 billion of profits from around 100 of the world's largest and most profitable" multinationals, the OECD said.
The deal will be delivered to a meeting Wednesday of Group of 20 finance ministers and central bankers in Washington, and to a G-20 summit in Rome later this month.
The tax floor aims to stop multinational enterprises from setting up subsidiaries in low-tax jurisdictions to reduce their tax burden. The global minimum rate will apply to companies with at least 750 million euros ($867 million) in annual consolidated revenue.
The digital tax provision covers enterprises with 20 billion euros in global turnover and pretax profit margins exceeding 10%. This covers only about 100 companies worldwide, including the likes of Google, Amazon, Facebook and Apple.
These businesses will face a tax equivalent to 25% of their profits above the 10% threshold, and countries where they have customers will have rights to a slice of this pie, based on the proportion of revenue earned there.
"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," U.S. President Joe Biden said following the announcement of agreement. "This race to the bottom hasn't just harmed American workers, it's put many of our allies at a competitive disadvantage as well."
European countries that had introduced their own digital services taxes, such as the U.K. and France, will scrap them under this framework. These levies had been a point of contention with the U.S., which had complained that they targeted American tech giants.
Several of the remaining holdouts, including Ireland -- which had drawn a number of multinational companies with its 12.5% rate -- said ahead of the meeting that they would sign on. Pakistan, Sri Lanka, Kenya and Nigeria have yet to join.
"This landmark agreement will address global tax challenges of digitalization and provide the certainty and stability that large business and government need," said Irish Finance Minister Paschal Donohoe in response to the agreement. "I am confident that Ireland will provide an attractive home for multinational enterprises long into the future."