The Group of Seven nations on Saturday agreed on a deal for a minimum corporate tax rate of 15%.
The group responded to a call by the United States for a minimum global tax for the largest multinationals to stop a race to the bottom that has lowered tax rates in recent decades.
The G7 states – the UK, the US, Canada, France, Germany, Italy and Japan – also aim to shore up government revenues amid the social and economic fallout of the COVID-19 pandemic, as well as the transformations caused by the globalisation and digitalisation of the economy.
“That global minimum tax would end the race-to-the-bottom in corporate taxation, and ensure fairness for the middle class and working people in the US and around the world,” US Treasury Secretary Janet Yellen said after the talks in London on Saturday.
The minimum tax level is part of a reform of corporate taxation that seeks to reallocate taxing rights between countries, not only based on tax residency but also depending on where a company has many customers and conducts business.
The reform targets predominantly, but not exclusively, tech companies that can deliver services without having much of a physical presence in their consumer markets and thereby escape taxes on their profits there.
The minimum tax, on the other hand, is aimed squarely at low-tax jurisdictions – including Cayman, Bermuda and the British Virgin Islands – and the ability of multinationals to shift profits to subsidiaries in locations where they are subject to little or no tax.
It would enable the home countries of multinationals to tax any amount that is left untaxed in other locations up to 15%.
German Finance Minister Olaf Scholz said, “This is very good news for tax fairness and solidarity and bad news for the tax havens of the world.”
French Finance Minister Bruno Le Maire said for the first time G7 members can define tax rules that fit the 21st century international system. “We’ve been fighting for four years in all European and international forums, here at the G7 and the G20 for a fair taxation of digital giants and for a minimum corporate tax.”
Although details of the agreement are still sparse, the G7 committed to awarding market countries taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational companies.
“We also commit to a global minimum tax of at least 15% on a country by country basis,” the group said in a communique, adding that both parts of the tax reform should be negotiated at the same time.
The 15% rate is significantly watered down from the US administration’s initial demand of 21% to enable a much-wider adoption.
However, it is enough to hit countries that are not typically considered offshore, like Ireland, Hong Kong or Luxembourg.
Ireland, which has a maximum corporate tax rate of 12.5% that helped it attract a large number of US tech companies, stands much to lose.
Irish Finance Minister Paschal Donhoe told reporters in London, “It does have consequences for the future of corporate tax policy across the world, but in the process that is to come, I’ll be making the case for the role of legitimate tax competition.”
Donohoe said he would engage constructively with the OECD – the organisation tasked by the G20 with global corporate tax reform.
He said any international agreement on how companies are taxed must also meet the needs of small and developing countries.
The new OECD Secretary-General Mathias Cormann welcomed the “ground-breaking” agreement by G7 finance ministers saying it is “a landmark step towards global consensus necessary to reform the international tax system”.
Cormann said, “Governments around the world need to be able to raise the necessary revenue to fund the essential public services and support that their populations require and expect, in a way that is efficient, least distorting and also fair and equitable.”
However, the final deal is not done yet.
G7 countries will now take the deal to the Group of 20 meeting in Venice, Italy, next month where they hope to extend the agreement to the G20 members.
Talks also continue among the 139 member countries and jurisdictions of the OECD/G20 Inclusive Framework on BEPS to reach a final deal so that “multinational companies pay their fair share everywhere”, Cormann said.
G7 nations still have to ratify their agreement in their home parliaments. This looks most problematic in the United States, where Congressional Republicans have already criticised the minimum tax rate as potentially harmful to US businesses and workers.