Finance ministers from the Group of Seven wealthy democracies agreed on Saturday to set a global minimum corporate tax of at least 15 percent in an effort to recoup a greater portion of income that multinational businesses stash away in low-rate nations and tax havens.
The deal reached among G-7 finance ministers meeting in London represents a major breakthrough in a long attempt to revamp international corporate tax laws, including forcing the world’s biggest companies to pay taxes in nations where their goods or services are sold even if they have no physical offices there.
The rules would apply to global firms with at least a 10 percent profit margin, the G-7 finance ministers said, and would see 20 percent of any profit above that 10 percent margin “reallocated” and then subjected to tax in the countries where they operate. The ministers agreed the G-7 nations would adhere to a global minimum corporate tax of at least 15 percent operated on a country-by-country basis, creating a more level playing field and cracking down on tax avoidance.
The G-7 nations — Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States — called it a “seismic agreement on global tax reform that will mean the largest multinational tech giants will pay their fair share of tax in the countries in which they operate.” They also agreed to follow the U.K.’s lead in making climate reporting mandatory and imposing measures to crack down on the proceeds of environmental crimes, according to a G-7 statement.
“I’m delighted to announce that G-7 finance ministers today, after years of discussions, have reached a historic agreement to reform the global tax system to make it fit for the global digital age and, crucially, to make sure that it’s fair, so that the right companies pay the right tax in the right places,” British Chancellor of the Exchequer Rishi Sunak said in a video statement.
🚨 At the @G7 in London today, my finance counterparts and I have come to a historic agreement on global tax reform requiring the largest multinational tech giants to pay their fair share of tax in the UK.
— Rishi Sunak (@RishiSunak) June 5, 2021
Ending the ‘race-to-the-bottom’
European nations, in particular, have wrestled with major tech companies such as U.S. heavyweights Amazon, Apple, Facebook and Google that collect revenue without paying more in taxes. U.S. President Joe Biden’s support for a global minimum corporate tax rate of at least 15 percent and possibly higher clinched the deal.
Concerned that the international corporate tax system fails to properly account for the global economy’s increasing digitalization, France unilaterally imposed a digital services tax on revenue from companies such as Google, Amazon and Facebook. More European nations followed suit. The G-7 agreement could supplant those unilateral digital taxes with a global deal.
The deal comes just ahead of Biden’s scheduled attendance at an annual summit of G-7 leaders next weekend in Cornwall, England during his first trip abroad as president. He also plans to visit NATO allies and European Union leaders before meeting with Russian President Vladimir Putin on June 16 at Geneva.
U.S. Treasury Secretary Janet Yellen said the G-7 finance ministers’ meeting produced “a significant, unprecedented commitment” that provides tremendous momentum towards fixing the problem. Negotiators hope the agreement will lead to a broader deal this summer among the Group of 20 major economies, and a final agreement before the end of the year. But an international tax treaty also would require approval by U.S. Congress and other parliaments to take effect.
“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 U.S. and around the world,” Yellen said. “The global minimum tax would also help the global economy thrive, by leveling the playing field for businesses and encouraging countries to compete on positive bases, such as educating and training our work forces and investing in research and development and infrastructure.”
Nick Clegg, the former U.K. deputy prime minister who now serves as Facebook’s vice president for global affairs, said the company welcomes the deal.
“Facebook has long called for reform of the global tax rules and we welcome the important progress made at the G-7. Today’s agreement is a significant first step towards certainty for businesses and strengthening public confidence in the global tax system,” he said on Twitter. “We want the international tax reform process to succeed and recognize this could mean Facebook paying more tax, and in different places.”