The United States, Britain and other industrialized countries reached a landmark agreement on Saturday to apply a tax framework to multinational companies such as Google, Apple and Amazon.
To help them cope with the aftermath of COVID-19, the Group of Seven Large Advanced Economies agreed to support a minimum tax rate of 15% and for companies to pay more taxes in the markets where they sell goods and services.
“The G7 Finance Ministers have reached a landmark agreement to reform the global tax system in order to adapt it to the global digital age,” British Finance Minister Rishi Sunak announced after chairing a two-day meeting in London. US Treasury Secretary Janet Yellen added that the “significant and unprecedented engagement” will end what she called
The agreement, which has taken years to develop, also promises to end national taxes on digital services applied by Britain and other European countries that the United States says unfairly affect US tech giants.
However, the measures will first have to find broader support at a G20 meeting – which includes several emerging economies – to be held next month in Venice. “It’s complicated, but this is a first step,” Sunak said.
Ministers also agreed to move forward with companies declaring their environmental impact in a more formalized way so that investors can more easily decide whether to finance them, a key goal for Britain.
Rich countries have struggled for years to come up with a way to raise more revenue from large multinationals like Google, Amazon and Facebook, which often record their profits in jurisdictions where they pay little or no taxes.
The administration of US President Joe Biden gave new impetus to the stalled talks by proposing a minimum global corporate tax rate of 15%, above that of countries like Ireland, but below the lowest level of the G7.
Germany and France also welcomed the deal, although French Economy Minister Bruno Le Maire said he would fight for a global minimum corporate tax rate of more than 15%, which he described as a “starting point”.
German Finance Minister Olaf Scholz stressed that the deal was “bad news for tax havens around the world.” “Companies will no longer be able to evade their tax obligations by recording their profits in countries with the lowest taxes,” he added.
Irish Finance Minister Paschal Donohoe, whose country is arguably a big loser with its 12.5% tax rate, indicated that any global deal will need to take smaller countries into account as well.
The agreement does not clarify exactly which companies will be covered by the rules, referring only to “the largest and most profitable multinational companies.”
What is the global minimum tax and what will it mean?
The major economies seek to discourage multinationals from shifting their profits to low-tax countries, regardless of where their sales are made.
Increasingly, revenues from intangible sources, such as drug patents, computer programs, and intellectual property rights, have migrated to these jurisdictions, allowing companies to avoid paying higher taxes in their home countries. traditional origin.
The G7 agreement is part of a much broader effort. The Organization for Economic Cooperation and Development (OECD) has been coordinating tax negotiations among 140 countries for years on rules for taxing cross-border digital services and curbing the erosion of the tax base, including a global minimum corporate tax.
OECD and G20 countries aim to reach consensus on both issues by mid-year, but talks on the global minimum for companies are technically simpler and less contentious. If a broad consensus is reached, it will be very difficult for any low-tax country to try to block the deal.
The minimum is expected to account for most of the $ 50-80 billion in taxes more that, according to the OECD, companies will end up paying around the world if agreements are reached on both fronts.
How will the multinational tax work?
The global minimum tax rate would apply to foreign earnings.
Governments will still be able to set whatever local tax rate they want, but if companies pay lower rates in a particular country, their home governments could “top up” their taxes down to the minimum rate, eliminating the advantage of shifting profits. .
The OECD had said last month that governments agreed on the basic design of the minimum tax, but not on the rate. Tax experts say this is the thorniest issue, although the G7 deal creates strong momentum around the 15% or higher level.
Other points that still need to be negotiated are whether mutual funds and real estate mutual funds should be covered, when to apply the new rate, and to ensure that it is consistent with US tax reforms aimed at deterring erosion.
Whats Next?
At the G20 meeting scheduled in Venice next month, it will be seen whether the G7 deal gets broad support from major developing and developing countries.
There are still many things to be specified, such as the parameters that will determine how and to which multinational companies the tax will be applied.
The G7 statement left open what will happen in the meantime with taxes on the digital services of big tech companies in various jurisdictions, which the United States wanted removed as soon as a deal was reached.
Any final agreement will have major repercussions for low-tax countries and tax havens.
