EXPLAINER: Curbing tax avoidance by multinational companies

FRANKFURT, Germany (AP) — How can governments keep multinational companies from avoiding taxes by shifting profits to subsidiaries in low-tax countries?

Years of international discussion over the issue gathered momentum after U.S. President Joe Biden proposed a global minimum corporate tax rate of at least 15% and possibly higher. The Biden proposal has found support among the Group of Seven wealthy democracies, raising the prospect that a new approach to international taxation might be reached this year.

That, at least, is the goal set by the Organization for Economic Cooperation and Development in Paris, which is overseeing talks among more than 135 countries.

Here are some key questions:

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WHAT IS A GLOBAL MINIMUM CORPORATE TAX?

Countries would change their tax laws so that if their companies’ profits go untaxed or lightly taxed offshore, the company would face an additional, top-up tax back home to bring its rate up to the minimum.

That would remove the incentive for companies to shift profits to low-tax countries, so the thinking goes, because if those companies escape taxes abroad, they would have to pay it at home anyway. And the minimum would weaken the motivation for countries to enact rock-bottom tax rates to attract companies in the first place.

At home, Biden has proposed raising the U.S. tax rate on companies’ foreign earnings to 21%. This would mark an increase from legislation passed under his predecessor Donald Trump, which had a range of 10.5% to 13.125%. Critics argued that the overseas rate passed under Trump, coupled with exemptions, was too low to deter corporations from profit-shifting.

Even if the U.S. rate winds up above the global rate, the difference could be small enough to eliminate most room for tax manipulation.

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HOW BIG IS THE...