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 more 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.
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, which includes China, Russia and Brazil.
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”.
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.
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.
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 aim will be to stop this from happening by making 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.
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.
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”. 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.”
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 agreement will be discussed in detail at a meeting of G20 finance ministers in July in Venice.