By DAVID McHUGH
AP Business Writer

Negotiators from 130 countries have agreed on a major overhaul of how the world’s biggest companies are taxed in an effort to deter international avoidance schemes that have cost governments billions in revenue.

It’s an attempt to better cope with a world where globalization and an increasingly digital economy mean that profits can move easily from one jurisdiction to another. The agreement was sealed Thursday in talks overseen by the Paris-based Organization for Economic Cooperation and Development, though there are still details to work out and hurdles to clear before it can take effect in 2023.

The key feature is a global minimum corporate tax of at least 15%, endorsing the broad outlines of a proposal from U.S. 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.

THE PROBLEM: TAX HAVENS AND THE ‘RACE TO THE BOTTOM’

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 today’s 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 U.S. Treasury Secretary Janet Yellen.

From 1985 to 2018, the worldwide average corporate statutory tax rate fell from 49% to 24%. From 2000-2018, U.S. companies booked half of all foreign profits in just seven low-tax jurisdictions: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland. The OECD estimates tax avoidance costs anywhere from $100 billion to $240 billion, or from 4% to 10% of global corporate income tax revenues.

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

THE SOLUTION: THE GLOBAL MINIMUM TAX

The talks seek to put a floor under corporate 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 15% floor for the global talks, though it could be higher.

ANOTHER PROBLEM: TAXING ‘DIGITAL’ COMPANIES

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 U.S. tech companies such as Google, Amazon and Facebook. The U.S. calls those unfair trade practices, and has threatened retaliation through import taxes.

THE SOLUTION: ALLOCATING TAXING RIGHTS

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 20% 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.

BIDEN’S PLANS

The OECD talks play 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 U.S. already passed a tax on foreign earnings under the Trump administration. But Biden wants to roughly double the Trump era rate to 21%, and also to charge that rate on a country-by-country basis so that tax havens can be targeted. The president also seeks to make it more difficult for U.S. companies to merge with foreign firms and avoid U.S. taxes, a process known as inversion.

All those changes must be approved by the U.S. 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.

WHAT’S NEXT?

The agreement reached at the OECD will be taken up by the Group of 20 countries representing 80 percent of the global economy. However, all 20 G-20 countries joined in signing the OECD deal, indicating broad agreement, at least with the outlines. The G-20 could give its final blessing at a summit Oct. 30-31 in Rome.

The global minimum tax would be voluntary. So countries would have to enact it into their own national tax codes on their own initiative. 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.

Some countries that took part in the OECD talks did not sign the agreement. They include Ireland and Hungary, both of which have corporate tax rates below the 15% minimum. Ireland’s finance minister, Paschal Donohoe, has said Ireland’s 12.5% rate is “a fair rate.” Donohoe said Thursday after the deal was announced that despite reservations about the rate, he remains “committed to the process” and aims “to find an outcome that Ireland can yet support.”

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 don’t 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.”

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AP Business Writer Josh Boak contributed from Washington, DC.