Australia is one of 130 nations that have agreed on efforts to ensure multinational companies pay their fair share of tax by establishing a minimum rate of 15 per cent.
Australia actually stands to benefit greatly from the new plan.
This is what you need to know.
What is the new global tax plan?
The basic idea of the new plan is that all signing countries have agreed to a new minimum tax rate of 15 per cent that is applicable to corporations.
Each country defines its own corporate tax rate, meaning countries with lower tax rates will often attract large multinationals to set up their headquarters there.
For example, Ireland’s corporate tax rate stands at just 12.5 per cent, while Australia’s is 25 per cent.
This means that Ireland has long been a popular choice for large companies to funnel their money through so they don’t need to pay as much tax.
The most notable part of this new plan is that large companies will now have to pay taxes in the countries they actually sell their goods or services in, as opposed to where the company is headquartered.
This is important because previously a large company could be selling advertising in Australia and making lots of money, but if the company wasn’t based here they wouldn't need to pay the 25 per cent tax rate.
How did companies dodge tax before?
Facebook was able to do this by viewing its Australian business as a “reseller” of its advertising and charged the Australian business “reseller expense”.
This meant the Australian business needed to pay its Californian parent company a fee.
Last year the Australian business paid a $559 million fee for the $700 million revenue it made.
That $559 million is expensed by the Californian parent company, and the Australian business is left paying tax on only $153 million.
Under the new plan this will no longer be possible, so Australia could start to receive a lot more tax revenue from the major corporations that sell their products and services here.
Paying their fair share
“After years of intense work and negotiations, this historic package will ensure that large multinational companies pay their fair share of tax everywhere,” Cormann said.
“This package does not eliminate tax competition, as it should not, but it does set multilaterally agreed limitations on it. It also accommodates the various interests across the negotiating table, including those of small economies and developing jurisdictions.”
Participants in the negotiation have set an ambitious timeline for conclusion of the negotiations.
This includes an October 2021 deadline for finalising the remaining technical work on the two-pillar approach, as well as a plan for effective implementation in 2023.