G7 finance ministers have made a ‘historic’ agreement to commit to a global minimum tax of at least 15 per cent on a country by country basis.
Chancellor Rishi Sunak hailed the deal as a ‘huge prize for British taxpayers’ and ‘proud moment’ for the world’s most-powerful finance ministers.
Meanwhile, Germany’s Olaf Scholz said the deal will ‘change the world’ as governments desperately looked to raise extra revenue post-Covid after a drop in tax receipts and massive borrowing.
The newly-agreed universal approach to taxing global companies will see huge multi-nationals – such as Google, Amazon and Facebook – forced to pay a levy on sales in the country in which they are earned.
As it stands, these companies often book profits in jurisdictions where they pay little or no tax.
It is hoped the move will end their advantage over domestic players, whether they be Tesco or John Lewis.
G7 finance ministers have made a ‘historic’ agreement to commit to a global minimum tax of at least 15 per cent on a country by country basis. Chancellor Rishi Sunak (pictured) hailed the deal as a ‘huge prize for British taxpayers’
In a video address shared after the agreement was made, Mr Sunak said: ‘I am delighted to announced that G7 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.
‘And that’s a huge prize for British taxpayers.
‘This is a very proud moment and I want to thank my G7 finance minister colleagues for their collective leadership and for their willingness to work together to seize this moment to strike a deal of historic significance that finally brings our global tax system into the 21st century.’
HM Treasury’s official Twitter account shared the video of Mr Sunak, along with an explanation on how the new taxation system will work.
The new rules will affect the larges global firms with profit margins of at least 10 per cent. A total of 20 per cent of any profit above the 10 per cent margin will be reallocated and then subjected to tax in the countries where they make sales.
The corporation tax this amount is subjected to will be 15 per cent at minimum – with the tax ‘operated on a country-by-country basis’.
Ministers hope this will create ‘a more level playing field for UK firms and cracking down on tax avoidance’.
A communique from G7 finance ministers read: ‘We commit to reaching an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises.
‘We will provide for appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes, and other relevant similar measures, on all companies.’
US President Joe Biden had been pushing for a global rate of 15 per cent ‘at least’, with rich nations struggling for years to agree a way to raise more cash from large multinationals such as Google, Amazon and Facebook, which often book profits in jurisdictions where they pay little or no tax.
Finance Ministers pose for a group photograph at Lancaster House during the G7 Finance Ministers meeting in London this morning
His proposal won broad support from some of the biggest powers in Europe, as well as the International Monetary Fund, with some ministers insisting last night that a deal is ‘within sight’.
Treasury sources said that, while no agreement had been reached as yet, they were ‘cautiously optimistic’ about the prospect of a deal.
UK Chancellor Rishi Sunak, while expressing support for the principle, is reportedly sceptical about setting a minimum rate too high, amid concerns it could see the UK’s economic activity being taxed elsewhere.
The UK has the G7’s lowest corporate tax rate at 19%, while at 12.5%, Ireland has one of the lowest anywhere in the world, making it hugely popular with the likes of Facebook and Google.
G20 countries, which includes emerging economies such as China and India, are also likely to be lobbied to sign up to the proposed rate floor of 15%.
Mr Sunak said the world had ‘high expectations’ for what could be agreed over the two-day summit, telling finance leaders the countries around the globe cannot ‘continue to rely on a tax system that was largely designed in the 1920s’.
And he said it was clear that taxation had to change in a ‘complex global digital economy’.
It has been suggested that the band of ministers want companies to pay taxes based on where their sales are, and not mainly where they have their operation, such as factories.
Rishi Sunak has told world finance leaders that the world cannot ‘continue to rely on a tax system that was largely designed in the 1920s’
US President Joe Biden has called for a unified minimum corporate tax rate of 15 percent in negotiations with the Organisation for Economic Co-operation and Development (OECD) and G20
The G7 discussions over corporation tax explained
WHY A GLOBAL MINIMUM TAX?
Major economies are aiming to discourage multinationals from shifting profits – and tax revenues – to low-tax countries regardless of where their sales are made.
Increasingly, income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to these jurisdictions, allowing companies to avoid paying higher taxes in their traditional home countries.
With its proposal for a minimum 15% tax rate, the Biden administration hopes to reduce such tax base erosion without putting American firms at a financial disadvantage, allowing competition on innovation, infrastructure and other attributes.
The Trump administration took a first stab with a U.S. corporate offshore minimum tax in 2017. The ‘Global Intangible Low-Taxed Income,’ or GILTI, tax rate was only 10.5% – half the domestic corporate tax rate.
WHERE ARE THE TALKS AT?
The G7 talks feed in to a much broader, existing effort. The Organization for Economic Cooperation and Development has been coordinating tax negotiations among 140 countries for years on rules for taxing cross-border digital services and curbing tax base erosion, including a global corporate minimum tax.
The OECD and G20 countries aim to reach consensus on both by mid-year, but the talks on a global corporate minimum are technically simpler and less contentious. If a broad consensus is reached, it will be extremely hard for any low-tax country to try and block an agreement.
The minimum is expected to make up the bulk of the $50 billion-$80 billion in extra tax that the OECD estimates firms will end up paying globally under deals on both fronts.
HOW WOULD A GLOBAL MINIMUM WORK?
The global minimum tax rate would apply to overseas profits.
Governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could ‘top-up’ their taxes to the minimum rate, eliminating the advantage of shifting profits.
The OECD said last month that governments broadly agreed on the basic design of the minimum tax but not the rate. Tax experts say that is the thorniest issue.
Other items still to be negotiated include whether investment funds and real estate investment trusts should be covered, when to apply the new rate and ensuring it is compatible with U.S. tax reforms aimed at deterring erosion.
WHAT ABOUT THAT MINIMUM RATE?
Talks are focusing around the U.S. proposal of a minimum global corporation tax rate of 15% – above the level in countries such as Ireland but below the lowest G7 level.
That rate is, however, somewhat lower than the 21% in discussion leading up to the G7 meeting and countries including France argue it should be viewed as a floor for setting a higher, more ambitious level.
Any final agreement could have major repercussions for low-tax countries and tax havens.
The Irish economy has boomed with the influx of billions of dollars in investment from multinationals. Dublin, which has resisted European Union attempts to harmonize its tax rules, is unlikely to accept a higher minimum rate without a fight.
However, the battle for low-tax countries is less likely to be about scuppering the overall talks and more about building support for a minimum rate as close as possible to its 12.5% or seeking certain exemptions.
In a briefing after Friday’s meeting, a Treasury spokesman said: ‘(Rishi) Sunak was clear that large digital firms should pay an appropriate level of tax where they operate so countries can raise revenue and invest in their public services – a priority for the Government – and highlighted that ‘opportunities to make truly lasting reforms like this do not come along very often’.’
Opening the session, Mr Sunak had said: ‘The G7 is a hugely important grouping and it’s an honour to be welcoming my counterparts to London with a renewed spirit of multilateral co-operation.
‘Even before holding the G7 presidency we’ve been clear on our priorities – protecting jobs, ensuring a green and global recovery and supporting the world’s most vulnerable countries.
‘Securing a global agreement on digital taxation has also been a key priority this year – we want companies to pay the right amount of tax in the right place, and I hope we can reach a fair deal with our partners.
‘I’m determined we work together and unite to tackle the world’s most pressing economic challenges – and I’m hugely optimistic that we will deliver some concrete outcomes this weekend.
‘Together we can make a real change and help steer the international community through the next stage of our recovery.’
Meanwhile, activists from climate action group Ocean Rebellion set a boat on fire this morning during a demonstration at sunrise at Marazion Beach, Cornwall, ahead of the G7 summit in Carbis Bay next week.
His comments come as US President Joe Biden has called for a unified minimum corporate tax rate of 15% in negotiations with the Organisation for Economic Co-operation and Development (OECD) and G20.
His proposal has so far won broad support from countries such as France and Germany, as well as the International Monetary Fund.
A deal is ‘within sight’, finance ministers from France, Germany, Italy and non-G7 member Spain declared Friday.
‘We have a chance to get multinational businesses to pay their fair share,’ France’s Le Maire, Germany’s Olaf Scholz, Italy’s Daniele Franco and Spain’s Nadia Calvino said in The Guardian newspaper.
‘For more than four years, France, Germany, Italy and Spain have been working together to create an international tax system fit for the 21st century,’ added the four ministers.
‘Now it’s time to come to an agreement.’
France’s Le Maire told journalists in London that Biden’s proposed 15 percent is ‘a minimum. For us, it’s a starting point’.
Along with its G7 and G20 partners, France wants ‘a more ambitious level of taxation,’ the minister said, with the current pandemic crisis showing that ‘tax evasion, the race towards the lowest possible level of taxation, is a dead end’.
Ireland has expressed ‘significant reservations’ about Biden’s plan, however.
Its 12.5% tax rate is one of the lowest in the world, prompting tech giants such as Facebook and Google to make Ireland the home of their European operations.
The UK-based anti-poverty organisation Oxfam argued that Biden’s proposal of 15% was too little, with the charity’s senior policy officer for France, Quentin Parrinello, telling AFP an agreement without a specific rate ‘would be a real failure’.
Proponents argue that a minimum tax is necessary to stem competition between countries over who can offer multinationals the lowest rate.
They say that a ‘race to the bottom’ saps precious revenues that could go to government priorities like hospitals and schools.
Momentum is growing behind the US-led plans to limit the ability of multinationals like tech giants to game the system to boost profits, especially at a time when economies around the world are reeling from the impact of the coronavirus pandemic.
‘Before the crisis, it was difficult to understand,’ a European source told AFP. ‘After the crisis, it is difficult to accept.’
Corporate tax is one of two pillars in efforts for global fiscal reform, the other being a ‘digital tax’ to allow countries to tax the profits of multinationals headquartered overseas.
Activists from climate action group Ocean Rebellion set a boat on fire during a demonstration at sunrise at Marazion Beach, Cornwall, ahead of the G7 summit in Carbis Bay, Cornwall
The boat was seen ablaze as the sun started to rise over Marazion Beach, Cornwall, today
The stunt featured a caricature of Boris Johnson and an Oilhead, pouring fuel on the fire
The demonstration comes ahead of the arrival of world leaders in Cornwall next weekend
The group behind the demonstration insists ‘the oil industry still exerts excessive influence over our politicians’
The action comes as finance minister from the G7 meet today to agree on a new minimum global level of corporation tax
According to the draft communique, ministers also plan to commit to ‘sustain policy support’, or stimulus, for ‘as long as necessary’ to nurture economic recovery, while addressing climate change and inequalities in society.
Furthermore, they will urge ‘equitable, safe and affordable access to Covid-19 vaccines’ everywhere.
Measures to tackle climate change as well as the thorny topic of the regulation of digital currencies such as bitcoin will also be on the agenda.