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The global race to 0% corporate tax has ended

June 21st, 2021 -

About 5 Mins
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How do the rich G7 nations plan to alter international tax?

The wealthy G7 nations have come to a shared agreement, whereby the global minimum corporate tax rate will be set at 15% on a country-by-country basis. The finance ministers of Canada, France, Germany, Italy, Japan, the United Kingdom and the US came together at the most recent summit, pledging their support for the allocation of taxes from major international companies to the nations in which they operate.

A follow-up G7 communiqué said, “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.”

There is little debate about the significance of this collective tax agreement. It is a significant move to end the 30-year race to the bottom of corporate taxes, as it has been called by US Treasure Secretary Janet Yellen. And it will mean that companies are no longer able to realise the benefits of foreign investment as a result of pushing countries into a tax-setting competition. However, it also highlights the imbalance of power, as the wealthy G7 nations set the rules for other countries across the world.

How has the US set the tax agenda?

Proposals for a major reduction of global minimum tax had been actively promoted by US President Joe Biden as a financial stimulus for a major infrastructure plan. It has been seen as an effective means of preventing multinational businesses from paying little to no American taxes.

The significance of the issue was highlighted by a Bank of America report revealing that around 60% of US multinationals’ reported foreign income was booked in small countries with relatively small economies (Bermuda, the Cayman Islands and Singapore being examples) in 2019.

The share of revenues did come to a stop following the passing of the 2017 Tax Cuts and Jobs Act, including measures to prevent companies from transferring profits to lower-tax jurisdictions in 2017. However, an economic report revealed that “the share did not decrease meaningfully and so profit shifting remains a major concern.”

Biden still has his work cut out when it comes to bridging the political divide, with Republicans continuing to argue against the tax change. Only time will tell whether he can successfully address the scepticism of countries such as Ireland (where the corporate tax rate currently stands at 12.5%).

Why has the minimum corporate tax rate received G7 backing?

It comes as no surprise that the tax rate reduction received the backing of G7 representatives, given shared agreement over the need to prevent the avoidance of national taxes. This applies in particular to those major tech companies, which could be injecting significant sums into government reserves severely affected by the pandemic.

German Finance Minister Olaf Scholz said, [this historic deal] “is very good news for tax justice and solidarity and 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.”

The sentiment was echoed by US Treasury Secretary Janet Yellen, who said the deal would “help the global economy thrive, by levelling the playing field for businesses and encouraging countries to compete on positive bases.”

What’s been the response of global businesses?

The agreement has prompted a mixed response from international companies. It was welcomed by some of the world’s biggest tech firms. However, negative responses focused on the anticipated hike in business costs.

Facebook’s Vice President of Global Affairs tweeted, “Facebook has long called for reform of the global tax rules and we welcome the important progress made at the G7. Today’s agreement is a significant first step towards certainty for businesses and strengthening public confidence in the global tax system.”

An Amazon spokesperson said that the tax proposals represented “a welcome step forward.” Going on to reveal the company’s hope of seeing “discussions continue to advance with the broader G20 and Inclusive Framework alliance.”

However, Oxfam released a statement saying: “It’s absurd for the G7 to claim it is ‘overhauling a broken global tax system’ by setting up a global minimum corporate tax rate that is similar to the soft rates charged by tax havens like Ireland, Switzerland and Singapore. They are setting the bar so low that companies can just step over it.”

“Stopping the explosion in inequality caused by Covid-19 and tackling the climate crisis will be impossible if corporations continue to pay virtually no tax… This is not a fair deal. The G7 can’t expect the majority of the world’s countries to accept crumbs from its table.”

Alex Cobham, of the Tax Justice Network, argued that the agreed figure should have been 25% at least. He continued to say that the setting of such a low rate is bound to decrease the benefits for countries across the world. The argument was made for the transfer of rate-setting responsibility to the United Nations, allowing for the introduction of a deal that would work for all, not just the rich G7 countries.

Will the tax plans come into effect?

It remains to be seen whether the 15% tax proposal will receive backing from countries outside the G7. There are also questions over the international rollout of the international tax update, which may be addressed during the next gathering of the OECD. While the deal is ground-breaking, there’s undoubtedly a long road ahead to international acceptance and implementation.

This content is provided for general information purposes only and is not to be taken as investment advice nor as a recommendation for any security, investment strategy or investment account.
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