NEGOTIATORS from 131 countries have agreed on a major overhaul of how the world biggest multinational companies are taxed. It`s an effort to deter complex international avoidance schemes that have cost governments billions in revenue.

The sweeping proposals are meant to better cope with a world where globalization and an increasingly digital economy mean profits can move easily from one jurisdiction to another. The agreement sealed last week in Paris was up for discussion last weekend among the Group of 20 finance ministers meeting in Venice.

The key feature of the complex package is a global minimum corporate tax of at least 15 per cent, following the broad outlines of a proposal from US President Joe Biden.

While the tax deal is complex in its details, the idea behind the minimum tax is simple: If a multinational company escapes taxation abroad, it would have to pay the minimum at home.

Here`s why it was proposed and how it would work.

Most countries only tax domestic business income of their multinational companies, on the assumption that the profits of their foreign subsidiaries will be taxed where they are earned.

But in todays economy, profits can easily slide across borders. Earnings often come from intangibles, such as brands, copyrights and patents. Those are easy to move to where taxes are lowest and some jurisdictions have been only too willing to offer reduced or zero taxation to attract foreign investment and revenue, even if companies do no real business there.

As a result, corporate tax rates have fallen in recent years, a phenomenon dubbed a race to the bottom by US Treasury Secretary Janet Yellen.

From 1985 to 2018, the worldwide average corporate statutory tax rate feII from 49pc to 24pc.

From 2000-2018, US companies booked half of all foreign profits in just seven lowtax jurisdictions: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland.

The OECD estimates tax avoidance costs anywhere from $100 to $240 billion, or from 4pc to 10pc of global corporate income tax revenues.

That`s money governments could use as they see deficits rise from spending on pandemic relief.

The talks seek to put a floor under corpo-rate tax rates by having countries legislate a minimum that they would levy on untaxed foreign income. In other words, if Company X headquartered in Country Y paid no or little tax on profits in Country Z, Country Y would tax those profits at home up to the minimum rate.

That would remove the reason for using a tax haven, or for setting one up. Biden has proposed a 15pc floor for the global talks, though it could be higher.

Another focus is what to do about companies that make profits in countries where they have no physical presence. That could be through digital advertising or online retail. Countries led by France have started imposing unilateral digital taxes that hit the biggest US tech companies such as Google, Amazon and Facebook. The UScalls those unfair trade practices, and has threatened retaliation through import taxes.

Biden`s proposal focuses on the 100 biggest and most profitable multinationals no matter what kind of business they are in, digital or not. Countries could claim the right to tax part of their profits under a proposal backed by the Group of Seven wealthy democracies, up to 20pc of the profits of companies above a profit margin of 10. Governments would have to roll back their unilateral taxes, defusing the trade disputes with the U.S.

The agreement, reached last week in talks convened by the Organization for Economic Cooperation and Development, plays a role in Biden`s push for changes that would, in his view, make the tax system fairer and raise revenue for investments in infrastructure and clean energy.

The US already passed a tax on foreign earnings under the Trump administration.

But Biden wants to roughly double theTrump era rate to 21pc, and also to charge that rate on a country-by-country basis so tax havens can be targeted. The president also seeks to make it more difficult for US companies to merge with foreign firms and avoid U.S. taxes, a process known as inversion.

All those changes must be approved by the US Congress, where the Democratic president has only a thin majority. Biden wanted a diplomatic win at the OECD talks so that other countries impose a form of a minimum tax to prevent companies from avoiding their potential tax obligations.

The agreement reached at the OECD is likely to be endorsed at the finance ministers` meeting since 20 G-20 countries joined in signing the OECD deal. More technical work would then be needed at the OECD before the G-20 would give its final blessing at a summit of heads of state and government Oct. 30-31 in Rome. Then comes implementation at the national level.

The global minimum tax would be voluntary. So countries would have to enact it into their own national tax codes on their own initiative. According to Gabriel Zucman, an economics professor at the University of California at Berkeley who has written extensively on tax havens, the minimum tax will still work even if some countries dont sign up. He said in a tweet that the fact remains: If some countries refuse to apply a minimum tax, then other countries will collect the taxes they refuse to collect.

The proposal to tax companies on earnings where they have no physical presence, such as through online businesses, would require countries to sign up to a written international agreement.

A key hurdle will be approval in the US Congress. Biden`s tax proposals, which would be needed to comply with the global minimum, face opposition from Republicans, and the Democratic president has only a narrow majority. Rejection by the U.S., the world`s largest economy and home to many of the biggest multinationals, could seriously undermine the global deal.

Any parts that are enshrined in a tax treaty would require a two-thirds vote in the U.S. Senate. Still, Biden could argue that passage would relieve US tech companies of burdensome national digital taxes that would have to be withdrawn in favor of the global arrangement a prospect that may have some bipartisan appeal.

-AP