On June 5, local time, the Group of Seven (G7), meeting in London, reached a historic agreement to set a global minimum corporate tax rate of at least 15%.
It is expected that G7 leaders may further implement the consensus of this meeting and formally sign the agreement at the G7 summit on June 11-13.
But the new rules, which want to be applied globally, still need to be agreed by the Group of 20 (G20) and the 135 countries whose negotiations are led by the Organization for Economic Cooperation and Development (OECD).
The G20 meeting is scheduled to be held in Venice next month, and the market will be focused on whether the relevant G7 agreement will be able to gain more countries’ support.
What are the main points of the agreement?
According to the official G7 statement after the meeting, the agreement mainly includes redistributing the taxing rights of multinational corporations’ global profits among tax jurisdictions (mainly for large multinational technology companies) and setting the global minimum corporate tax rate at at least 15%.
In terms of taxing rights reform, the G7 finance ministers agreed that the largest and most profitable multinationals will be required to pay taxes in the countries in which they operate, not just where they are headquartered.
These provisions will apply to multinationals with profit margins of at least 10 percent – 20 percent of profits in excess of 10 percent will be redistributed, and the countries in which they operate will have the right to tax that portion.
In terms of a global minimum corporate tax, G7 finance ministers agreed to impose a global minimum corporate tax of at least 15 percent on top of the current national tax base to combat tax avoidance and ensure a level playing field.
For G7 countries, a 15% minimum tax rate is well below their current levels. According to the Tax Foundation, the corporate tax rates in France, Germany, Italy, Japan and the United Kingdom are 32%, 29.9%, 27.8%, 29.7% and 19%, respectively, in 2020.
However, countries with low tax rates worldwide will inevitably be affected by the relevant policies.
According to the Tax Foundation, countries with corporate tax rates below 15 percent in 2020 include Cyprus (12.5 percent), Ireland (12.5 percent), Kyrgyzstan (10 percent), Qatar (10 percent) and Hungary (9 percent), as well as tax havens such as Jersey, the Cayman Islands and the British Virgin Islands, where the tax rate is zero.
The joint statement of the G7 finance ministers’ meeting “will provide for appropriate coordination between the application of new international tax rules and the elimination of all taxes on digital services for all companies, as well as other relevant similar measures” on the previously highly publicized issue of digital taxes for technology companies.
This means that the current digital tax policies of some countries will remain unchanged for the time being.
What is the lowest corporate tax rate in the world?
The U.S. and other countries have generally been lowering their tax rates over the past few decades to attract business investment.
According to the Tax Foundation, a U.S. think tank, the global average corporate tax rate has fallen from about 40 percent in 1980 to about 23 percent in 2020.
This has led multinational corporations to increasingly deposit profits in tax havens overseas where little actual economic activity takes place in order to rationalize tax avoidance.
This has led to huge losses in tax revenue for governments. The United Nations estimates that the shifting of profits by multinational corporations results in an annual loss of tax revenue to governments of as much as $500 billion to $600 billion.
After taking office, the Biden administration pushed a number of massive economic stimulus bills to get rid of the new crown epidemic and advocated raising funds by taxing the rich. But in order to prevent multinational corporations from moving overseas to avoid taxes, Yellen appealed to the Group of Twenty (G20) in April this year to set up a minimum corporate tax worldwide.
Market analysis suggests that the Biden administration wants to raise the corporate tax rate to raise money, but unilaterally raising the domestic tax rate will make it more difficult for the U.S. to attract investment, but if other countries impose similar taxes, multinational companies will not be able to easily shift profits out of the U.S.
By setting the lowest corporate tax in the world, the Biden administration can reduce the phenomenon of tax base erosion without putting U.S. companies at a financial disadvantage, thus allowing U.S. companies to compete with other countries in terms of innovation, infrastructure, etc.
U.S. Treasury Secretary Yellen made clear that a global minimum corporate tax rate would “level the playing field for businesses and encourage countries to compete on positive grounds, such as educating and training their workforce and investing in research and development and infrastructure.
A global minimum corporate tax rate would also raise hundreds of billions of dollars for countries around the world to fill the huge deficit gap created by the massive fiscal stimulus.
But the agreement has not yet specified which businesses will be included, involving only the largest and most profitable multinationals. Reuters reports that the global minimum tax will be imposed on only the 100 largest and most profitable companies in the world.
What will happen in the future?
If countries agree on a global minimum tax rate, then national governments can still set their own local corporate tax rates as they see fit. But if a company pays a lower rate in a particular country, the government of that country could require it to “top up” its taxes to the minimum rate, eliminating the profit-shifting advantage.
However, it will take some time before the agreement is fully implemented.
Under the principle of sovereign tax independence, other countries are not obligated to accept the U.S. proposal. A global corporate minimum tax can only be achieved in a multilateral context, where multiple countries, or even all countries, agree.
If the OECD agrees on this tax rate, it will also require the signing of multilateral conventions by the relevant countries and regions, as well as legislative amendments and adjustments by the countries themselves.
External analysis believes that the ratification of the agreement may encounter huge obstacles at the low tax rate countries such as Ireland.
Ireland has been resisting the EU’s harmonization of its tax rules for many years, and is one of the few countries that have reservations about the minimum corporate tax agreement. If Ireland does not agree, then a system like the EU, which requires the unanimous consent of all member states, will not be able to reach consensus.
Outside analysis suggests that in order to reach an agreement, the United States may then give partial exemptions or offer compensation, making concessions on topics of concern to the EU such as digital taxes.