The International Monetary Fund (IMF) called on nations to reach a global agreement on corporate income taxation this year to avoid a tax or trade war.

"We are particularly optimistic for a global agreement on corporate income taxation in 2021," said Kristalina Georgieva, managing director of the IMF on Tuesday. 

"It is urgently needed to avoid, down the road, the risk of spiraling into a chaotic tax or trade war where everyone loses," she said.

Major economies are aiming to discourage multinational companies from shifting profits, and tax revenues, to low-tax countries regardless of where their sales are made. Increasingly, income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to these jurisdictions, allowing companies to avoid paying higher taxes in their traditional home countries.

The global minimum tax rate would apply to companies' overseas profits. Therefore, if countries agree on a global minimum, governments could still set whatever local corporate tax rate they want.

But if companies pay lower rates in a particular country, their home governments could "top-up" their taxes to the agreed minimum rate, eliminating the advantage of shifting profits to a tax haven.

Georgieva said the IMF "fully supports" the Inclusive Framework on Base Erosion and Profit Shifting at the Organization for Economic Co-operation and Development, which involves 139 economies, as a way to reform international taxation.

"This type of multilateral approach is the only way to ensure that highly profitable multinational firms both pay sufficient tax and pay it to countries where they have significant engagement, including in low-income developing countries," she said.

Georgieva's remarks came after U.S. Treasury Secretary Janet Yellen last month called for working with G20 economies to agree to a global minimum corporate tax rate that would provide a more level playing field for all countries.

(With input from Xinhua, Reuters)