The finance ministers of the G7, the seven most industrialized countries, today agreed to commit themselves to a minimum corporate tax rate of 15% in their respective countries.
“We strive to achieve an equitable solution in terms of distribution of tax rights with countries acquiring tax rights in the amount of at least 20% of profits, which will exceed 10% margin for the largest and most profitable multinational companies,” the ministers said in a statement. quoted by Reuters.
“We will ensure the necessary coordination between the implementation of new international tax rules and the abolition of all taxes on digital services,” the statement said.
Affected companies may include tech giants such as Amazon and Google.
It was reported this week that Microsoft’s Irish subsidiary paid zero corporate income tax of $ 315 billion (£ 222 billion) last year as it was resident in Bermuda for tax purposes.
The deal, announced Saturday between the US, UK, France, Germany, Canada, Italy and Japan, and the EU, could result in billions of dollars to flow to governments to pay off debts incurred during the Covid crisis.
Negotiations have been going on for many years, and this will force other countries to follow suit, including at the G20 meeting next month.
Why were the rules changed?
Governments have long wrestled with the problem of taxing global companies operating in many countries. This problem has grown with a boom in huge tech corporations like Amazon and Facebook.
Currently, companies can set up local offices in countries with relatively low corporate tax rates and declare profits there.
This means that they only pay the local tax rate, even if the profits mainly come from sales made elsewhere. This is legal and usually done.
The deal aims to prevent this in two ways.
First, the G7 will seek to force companies to pay more taxes in the countries where they sell their products or services, rather than where they ultimately declare their profits.
Second, they need a global minimum tax rate to avoid a race to the bottom, where countries can undermine each other with low tax rates.
What is the essence of the agreement?
The rules under which multinational corporations pay taxes where they operate – known as the “first pillar” of the agreement – will apply to global companies with at least 10% profit margins.
According to the G7 communiqué, twenty percent of any profit is higher, which will be redistributed and taxed in the countries where they operate.
The second “pillar” of the agreement obliges states to set a global minimum corporate tax rate of 15% so that countries do not undermine each other.
The agreement will now be discussed in detail at a meeting of G20 finance ministers and central bank governors in Venice in July. The G20 consists of 19 countries plus the EU.
How did corporations react?
An Amazon spokesman, quoted by Reuters, said: “We believe the OECD-led process that creates a multilateral solution will help ensure the stability of the international tax system.
“The G7 Agreement marks a welcome step forward in efforts to achieve this goal.”
A Google spokesman said: “We strongly support the work being done to update international tax rules. We hope the countries will continue to work together to reach a balanced and lasting agreement soon. ”