The world’s richest countries have struck an “historic” agreement to reform global tax rules in a bid to prevent big business dodging their tax obligations.
The US, Britain, Germany and other leading nations of the G7 reached the landmark deal that could raise hundreds of billions of dollars to help them cope with the aftermath of COVID-19.
Finance ministers meeting in London agreed to a global corporate tax rate of at least 15 per cent designed to prevent companies booking their profits in countries with the lowest tax.
They also agreed that corporations should pay more tax in the places where they sell goods and services which would stop businesses — including US-based tech giants — shifting profits overseas to avoid higher tax rates.
Rich nations have struggled for years to agree on how to raise more revenue from large multinationals such as Google, Amazon and Facebook, which often book profits in havens where they pay little or no tax.
British finance minister Rishi Sunak, who chaired the two-day meeting in London, announced the deal as an “historic agreement to reform the global tax system to make it fit for the global digital age”.
US Treasury Secretary Janet Yellen said the “significant, unprecedented commitment” would level the playing field for businesses.
“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,” she said.
US President Joe Biden’s administration gave the stalled talks fresh impetus by proposing a minimum global corporation tax rate of 15 per cent, above the level in countries such as Ireland but below the lowest level in the G7.
Germany and France also welcomed the agreement, although French Finance Minister Bruno Le Maire said he would fight for a higher global minimum corporate tax rate than 15 per cent, which he described as a “starting point”.
German finance minister Olaf Scholz said the deal was “bad news for tax havens around the world”.
“Companies will no longer be in a position to dodge their tax obligations by booking their profits in the lowest-tax countries,” he added.
Irish finance minister Paschal Donohoe, whose country is potentially a big loser with its 12.5 per cent tax rate, said any global deal also needed to take account of smaller nations.
Mr Sunak said the deal was a “huge prize” for taxpayers, but it was too soon to know how much money it would raise for Britain.
The agreement does not make clear exactly which businesses will be covered by the rules, referring only to “the largest and most profitable multinational enterprises”.
The meeting of finance ministers came ahead of an annual summit of G-7 leaders scheduled for June 11-13 in Cornwall, England.
The endorsement from the G-7 could help build momentum for a deal in wider talks among more than 135 countries being held in Paris as well as a Group of 20 finance ministers meeting in Venice in July.
The ministers also agreed to move towards making companies declare their environmental impact in a more standard way so investors can decide more easily whether to fund them, a key goal for Britain.
Facebook said the deal is a big step toward increasing business certainty and raising public confidence in the global tax system but acknowledged it could cost the company.
The G7’s global tax proposals
The tax proposals endorsed at the G7 have two main parts.
The first part lets countries tax a share of the profits earned by companies that have no physical presence but have substantial sales, for instance through selling digital advertising.
France had launched debate over the issue by imposing its own digital services tax on revenues it deemed to have been earned in France by companies such as Google, Amazon and Facebook. Other countries have followed suit.
The US considers those national taxes to be unfair trade measures that improperly single out American firms.
Part of the agreement is that other countries would repeal their unilateral digital taxes in favour of a global agreement.
The G-7 statement echoes a US proposal to let countries tax part of the earnings of the “largest and most profitable multinational enterprises – digital or not – if they are doing business within their borders.
It supported awarding countries the right to tax 20 per cent or more of local profits exceeding a 10 per cent profit margin.
Ms Yellen, asked if she had given her European counterparts assurances that large US tech firms would be included, said the agreement “will include large profitable firms, and I believe those firms will qualify by almost any definition.”
The other main part of the proposal is for countries to tax their home companies’ overseas profits at a rate of at least 15 per cent.
That would deter the practice of using accounting schemes to shift profits to a few very low-tax countries because earnings untaxed overseas would face a top-up tax in the headquarters country.
In the US, Mr Biden is proposing a 21 per cent US tax rate on companies’ overseas earnings, an increase from the 10.5 per cent to 13.125 per cent enacted under former president Donald Trump.
Even if the US rate winds up higher than the global minimum, the difference would be small enough to eliminate most room for tax avoidance. Mr Biden’s proposal requires congressional approval.