G7: Rich nations back deal to tax multinationals

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media captionUK Chancellor Rishi Sunak said the agreement was “a huge prize for British taxpayers”

The G7 group of advanced economies has reached a “historic” deal to make multinational companies pay more tax.

Finance ministers meeting in London agreed to battle tax avoidance by making companies pay in the countries where they do business.

They also agreed in principle to a global minimum corporate tax rate of 15% to avoid countries undercutting each other.

Tech giants such as Amazon and Google could be among those affected.

It was reported this week that an Irish subsidiary of Microsoft had paid zero corporation tax on $315bn (£222bn) profit last year because it was resident in Bermuda for tax purposes.

The deal announced on Saturday, between the US, the UK, France, Germany, Canada, Italy and Japan, plus the EU, could see billions of dollars flow to governments to pay off debts incurred during the Covid crisis.

Negotiated over many years, it will put pressure on other countries to follow suit, including at a meeting of the G20 next month.

image copyrightPA Media

image captionThe G7 attendees posed for photos at Lancaster House

US Treasury Secretary Janet Yellen told reporters that the “historic” agreement on a 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 around the world”.

“The global minimum tax would also help the global economy thrive by levelling the playing field for businesses and encouraging countries to compete on positive bases,” she added.

UK Chancellor of the Exchequer Rishi Sunak, who hosted the summit, said the agreement would make the global tax system “fit for the global digital age”.

His German counterpart, Olaf Scholz, said it was “very good news for tax justice and solidarity and bad news for tax havens”.

“Companies will no longer be in a position to dodge their tax obligations by booking their profits in lowest-tax countries,” he said.

Why did they want to change the rules?

Governments have long grappled with the challenge of taxing global companies operating across many countries.

That challenge has grown with the boom in huge tech corporations like Amazon and Facebook.

image copyrightEPA

image captionKristalina Georgieva, managing director of the International Monetary Fund, left, appeared to share a joke with Janet Yellen, the US treasury secretary

At the moment companies can set up local branches in countries that have relatively low corporate tax rates and declare profits there.

That means they only pay the local rate of tax, even if the profits mainly come from sales made elsewhere. This is legal and commonly done.

The deal aims to stop this from happening in two ways.

Firstly the G7 will aim to make companies pay more tax in the countries where they are selling their products or services, rather than wherever they end up declaring their profits.

Secondly, they want a global minimum tax rate so as to avoid countries undercutting each other with low tax rates.

The right to tax is the essence of sovereign power. That is why co-ordinated international action is so difficult.

It has been the dream of campaigners and mainly European finance ministers for years. They would scarcely have believed it was possible until the past few months. But the need to fill coffers emptied by the pandemic, and the arrival of the Biden administration in the US, created a moment of opportunity.

There was, however, a big compromise to get this across the line. A minimum corporation tax rate of 15% is rather low. Although European finance ministers succeeded in including the phrase “at least 15%”, which offers a path to get that number higher.

How much bite this change actually has will depend on the fine print of ongoing negotiations. Tech firms say they welcomed the move. Facebook vice president Nick Clegg said they recognised it could mean the company “paying more tax, and in different places”.

And then there is the question of the rest of the world. This now goes from the G7 to the wider G20 group, including China, Russia and Brazil, and then beyond.

The German finance minister told me that the likes of Ireland, with its low corporation tax rate, now needed to “get on the train”.

The Irish finance minister told me he accepted that change was coming, but he would continue to argue for legitimate tax competition.

A process has begun, a precedent has been set. It may or may not end up being transformative, but this moment is historic.

How would the agreement work?

The rules on making multinationals pay taxes where they operate – known as “pillar one” of the agreement – would apply to global companies with at least a 10% profit margin.

Twenty percent of any profit above that would be reallocated and taxed in the countries where they operate, according to the G7 communiqué.

In the case of the UK, for example, more tax revenue would be raised from large multinationals and would help pay for public services.

The second “pillar” of the agreement commits states to a global minimum corporate tax rate of 15% to avoid countries undercutting each other.

The agreement will now be discussed in detail at a meeting of G20 financial ministers and central bank governors in July in Venice. The G20 is made up of 19 countries plus the EU.

image copyrightReuters

image captionJapan’s Finance Minister Taro Aso (L) rubbed elbows with European Commissioner for Economy Paolo Gentiloni

Paolo Gentiloni, the EU commissioner for the economy, described Saturday’s agreement as a “big step… towards an unprecedented global agreement on tax reform” and promised the EU would “contribute actively to making that happen” in Venice.

Irish Finance Minister Paschal Donohoe, whose country offers a low 12.5% corporate tax rate, tweeted that it was in “everyone’s interest to achieve a sustainable, ambitious and equitable agreement on the international tax architecture”, but any agreement would have to “meet the needs of small and large countries, developed and developing”.

He referred to the Organisation for Economic Co-operation and Development (OECD), an intergovernmental economic organisation with 38 member countries, which promotes world trade.

How have the corporations reacted?

A spokesperson for Amazon quoted by Reuters news agency said: “We believe an OECD-led process that creates a multilateral solution will help bring stability to the international tax system.

“The agreement by the G7 marks a welcome step forward in the effort to achieve this goal.”

A spokesperson for Google said: “We strongly support the work being done to update international tax rules. We hope countries continue to work together to ensure a balanced and durable agreement will be finalised soon.”

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