On July 1, 2021, the Organization for Economic Cooperation and Development (OECD) announced that 130 countries had signed on to an agreement to institute a global minimum tax rate of 15% on multinational corporations. This followed a June announcement from the Group of 7 (G7), an organization of seven of the world’s highest performing economies, that they had agreed to a similar global minimum corporate tax rate and would seek the buy-in of other nations. An arrangement without precedent, the agreement has the potential to reshape the relationship between multinational corporations and sovereign states.

The current global corporate taxation regime is, put bluntly, a free-for-all in which massive advantages are accrued to multinational corporations at the expense of national governments and citizens of nations across the world. In the aftermath of the deregulatory blitz of the 1980s, countries have engaged in what United States Treasury Secretary Janet Yellen has called a “thirty-year race to the bottom,” wherein nations have lowered their corporate tax rates in order to attract the business of multinational corporations and their subsidiaries. Tax havens, countries which impose shockingly low corporate tax rates either by law or through shady legal practices, have sprung up  among developing countries (e.g. Bermuda and Panama) and developed countries (e.g. Ireland and the Netherlands) alike. At the same time, the tax codes of rich countries like the United States are riddled with loopholes that allow domestically-headquartered corporations to shift profits into tax havens, dodging their own higher statutory tax rates.

The result is that the nations of the world are losing massive amounts of revenue to corporations, with estimates ranging as high as hundreds of billions of dollars globally per year, exacerbating economic inequality within their own borders. If sovereign states attempt to unilaterally rein in the evasive behavior of corporations, corporations can credibly threaten to pack up their domestic operations and move them to another country with a friendlier corporate tax regime.

The new OECD framework, however, is centered around a “top-up tax,” which means that companies using tax havens would have to pay their home country the difference between the rate of the tax haven country and the 15% rate. For example, a US company using Ireland as a tax haven, which has a corporate tax rate of 12.5%, would be subject to an additional 2.5% tax in America, establishing a minimum amount of tax that cannot be avoided.

The genius of the new agreement is that it allows corporations to continue their international business operations while also leveraging international cooperation to re-assert the power of the nation-state in holding the economic elite accountable. As the world grows smaller and more integrated in the wake of globalization, it is more important than ever that democratic nations do not allow unaccountable actors to subvert the authority of the people, even–especially–in international affairs. While this new agreement faces myriad challenges with respect to enforcement mechanisms and pushback from corporations, it is a crucial step in the right direction.