A group of 136 countries, including India, on Friday, 8 October, set a minimum global tax rate of 15 percent for big companies, with the intention of making it harder for them to avoid taxation.
The landmark deal looks to end a four-decade-long "race to the bottom" by setting a floor for countries that have sought to attract investment and jobs by taxing multinational companies lightly.
This has effectively allowed big companies to take advantage of low tax rates in countries where they are incorporated on paper, while they pay little to no taxes in the countries they actually earn most of their revenues from.
The agreement mandates a minimum corporate tax rate of 15 percent for big companies and allows governments to tax a greater share of profits made by foreign multinationals.
The President of the United States of America, Joe Biden, welcomed the deal saying that it sets a level playing field, reported Reuters.
"Establishing, for the first time in history, a strong global minimum tax will finally even the playing field for American workers and taxpayers, along with the rest of the world", said Biden in a statement.
Negotiations for this deal have been going on for four years, but it got renewed impetus because of the coronavirus pandemic. The final deal, however, was only agreed upon when Ireland, Estonia and Hungary dropped their opposition to it and decided to sign it.
Moreover the 15 percent floor agreed to is also well below the corporate tax rate in most countries, which averages around 23.5 percent in industrialised countries, said the Reuters report.
Out of the 140 countries involved, 136 supported the deal, with Kenya, Nigeria, Pakistan and Sri Lanka abstaining from the vote. The Paris-based Organisation for Economic Cooperation and Development (OECD), which has been leading the talks, said that the deal would cover 90 percent of the global economy.
"We have taken another important step towards more tax justice," German Finance Minister Olaf Scholz said in a statement emailed to Reuters.
"We now have a clear path to a fairer tax system, where large global players pay their fair share wherever they do business," his British counterpart Rishi Sunak said.
However, some countries are already raising red flags.
In a statement, the finance ministry of Switzerland has demanded that the interests of small economies be taken into account and said that the 2023 implementation date was impossible. Poland has also raised concerns regarding the impact of the deal on foreign investors and has said that it would "keep working on the deal".
The OECD said that the new taxation floor would see countries collect around USD 150 billion in new revenues annually while taxing rights on more than USD 125 billion of profit would be shifted to countries where big multinationals earn their income.
(With inputs from Reuters)
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