What does the OECD global minimum tax mean for global cooperation?

More than 140 countries have committed to implement a new global tax agreement aimed at ensuring multinational companies pay a minimum rate of tax.

The deal, which was proposed by the Organisation for Economic Co-operation and Development (OECD), imposes a minimum effective rate of 15% on corporate profits. The policy is aimed at ending the benefit of shielding multi-billion-dollar profits in tax havens. It is also intended to remove the incentive for nations that operate as tax havens for corporate giants.

The OECD estimates the Global Minimum Tax (GMT) policy will reduce under-taxed profits by around 80%, as it applies across geographies, national income boundaries and tax haven structures.

The GMT seeks to end the practice of multinational companies shifting profits to low-tax countries and territories, even though the income was generated elsewhere. The Financial Times explains that, under the GMT agreement, if a country levies a tax rate below 15% other countries will be able to impose a top-up tax that brings the total up to the minimum level.

Countries that have previously operated as tax havens, including Ireland, Luxembourg, Switzerland and Barbados, are implementing the minimum rates, according to the Financial Times.

Companies with earnings above €750 million ($812 million) are subject to the new 15% rate and the OECD estimates profit shifting will fall by half in the coming years.

The first step towards a fair and just tax system

The potential impact of the GMT was the focus of a discussion at the 2024 Annual Meeting of the World Economic Forum in Davos, Switzerland.

Speaking in a session entitled, ‘Tax in Motion’, Lucas Chancel, Associate Professor at the Institute of Political Studies in Paris, said the GMT was a good first step but would do little in addressing the overall injustice of national and global tax structures.

“We're very far from having solved the problem of tax justice in this world. For one thing, the 15% minimum tax is still much lower than what small and medium businesses pay in most countries in this world … so we really need to fix these loopholes at the top of the tax system,” Chancel told the panel in Davos.

The GMT tax agreement is a positive sign of global cooperation at a time when relations between powerful countries and global regions are becoming ever more strained.

Launched at Davos 2024 by McKinsey & Company and the World Economic Forum, the Global Cooperation Barometer shines a light on the current state of international cooperation. The report finds that at a time when multiple global challenges require urgent cooperation, the broad trend is for inward-looking entrenchment, polarization and fragmentation.

But as the GMT deal demonstrates, global cooperation can coexist alongside competition. Indeed, there are multiple examples of newly forged trade deals that provide a sense of optimism against a backdrop of polarization.

Trade is the number one driver of global cooperation identified in the report, which looks at five pillars to provide a snapshot of the current state of international cooperation.

The year ahead is likely to offer challenges and opportunities for global cooperation. In 2024, more than 60 countries will hold elections, including major economies such as the US, the UK and India. The outcomes of these elections will likely have impacts beyond their borders and shape international relations for years to come.