G7 Finance Ministers reach global minimum tax agreement

G7 Finance ministers agreed, at a meeting in London on 5 June 2021, to back a new international agreement on global tax reform that is designed to ensure that big multinational companies pay their ‘fair share’ of tax in the countries in which they do business. It could form the basis of a worldwide deal.

During the meeting, chaired by UK Chancellor Rishi Sunak, finance ministers agreed the principles of a two-Pillar global solution to tackle the tax challenges arising from an increasingly globalised and digital global economy.

The OECD has been coordinating tax negotiations among 140 countries on rules for taxing cross-border digital services and curbing tax base erosion, including a global corporate minimum tax, since the aftermath of the 2008 financial crisis.

The OECD hopes that support from the G7 will spur wider backing at the G20 Financial Ministers & Central Bank Governors meeting in Italy in July. The G20 includes China, Russia and Brazil. If a broad agreement is reached, it will be difficult for any low-tax country to block it. The aim is to strike a comprehensive agreement by October.

Under Pillar One, the largest and most profitable multinationals – about 100 firms worldwide would be within scope – will be required to pay tax in the countries where they operate rather than just where they have their headquarters. The rules would apply to global firms with at least a 10% profit margin and would see 20% of any profit above the 10% margin reallocated and then subjected to tax in the countries they operate.

Under Pillar Two, the G7 also agreed to the principle of 15% global minimum corporation tax operated on a country-by-country basis, creating a more level playing field for business and cracking down on tax avoidance. This proposal is likely to capture up to 8,000 multinationals. The proposed 15% tax rate is regarded as low. European finance ministers succeeded in including the phrase “at least 15%”, which offers a path to get that number higher.

The global minimum tax rate would apply to overseas profits. National governments could still set their own local corporate tax rate, but if companies pay lower rates in a particular country, their home governments could ‘top-up’ their taxes to the minimum rate, eliminating any potential advantage from shifting profits.

The G7 proposals have not been universally welcomed. The Tax Justice Network is advocating a minimum tax rate of 25%. Chief executive Alex Cobham said: “The world’s eyes were on the G7, hoping that in the face of this global pandemic they would throw their weight behind a new tax system that would bring back home to all countries the billions in corporate tax they were robbed of and urgently need to rebuild and recover. Instead, the G7 finance ministers are proposing to follow OECD proposals that would ensure the G7 themselves take the lion’s share of any new tax revenues – which will in any case be limited by their lack of ambition.”

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