The historic deal signed this weekend is intended to prevent digital companies such as Google and Facebook from playing a cat-and-mouse game with national tax authorities.
G7 finance ministers have established a minimum global corporation tax rate of 15% – a rate that can ultimately be applied by all nations. One that they believe tackles the huge inequalities between the major, mostly US digital firms, and the rest of the business community, a divide that has been made worse during the pandemic.
Words like “historic” and “landmark” are being used here because international tax deals are rare – and usually scuppered by countries that either charge low levels of tax, such as Ireland, Hungary and Cyprus, or that have close ties to tax havens, such as the UK and the Netherlands.
It is a stark contrast to a year ago, when Donald Trump’s White House team was fighting at every turn against proposals put forward by the Paris-based Organisation for Economic Cooperation and Development (OECD) for a global corporate tax rate.
Trump supported low taxes on corporations as a matter of principle but also wanted the likes of Amazon, Apple and Google to dominate the world, in order to prevent Beijing from exercising its growing strength in digital services.
With Joe Biden installed as US president, the situation has turned 180 degrees. With a headwind of support for higher taxes on corporations and the super-rich to pay for his recovery programmes, Biden embarked on an ambitious plan to get agreement on a 21% minimum tax rate, since watered down to 15% this weekend.
The deal must now go forward to the G20 group of nations, where China and Russia, among others, will consider whether they want to back the proposals.
Critics say Biden, the UK chancellor, Rishi Sunak, and EU leaders should stand firm and revive the 21% proposal. Too often, minimum tax rates become the norm, and 15% is well below the level set by many developed countries.
Most EU countries support the higher rate, yet have been hampered in their efforts to present a unified stance when Ireland, the co-chair of the eurozone group of finance ministers and an effective lobbyist for low taxes, stands with Cyprus and Hungary. They charge 12.5%, 12.5% and 9% corporate tax rates respectively.
On Friday morning the finance ministers of Germany, France, Italy and Spain went into the negotiations talking tough, but it appears that rather than dissenting in favour of 21%, they were dragged into a compromise along with other G7 members.
Sunak’s stance appears equivocal. He has declared himself a supporter of a global deal, but there is a suspicion that he is going along with the plan to stay onside with the US – not because he believes in it.
The former hedge fund manager has a large constituency of Tory MPs who support low corporate taxes and will pounce on anything that smells like a loss of sovereignty so soon after Brexit. In the detail of any deal will be clauses preventing finance ministries from offering inducements and tax breaks that effectively undermine the 15% minimum.
These clauses will be hammered out as it reaches its next hurdle before final agreement by the G20. Will the government support these measures, or lobby against them to maintain the flexibility it sought when pursuing Brexit?
The tax deal explained
The proposed regime would create a new right for countries to tax the largest multinationals’ profits based on where they make their sales. Guidelines written by the OECD are primarily focused on large digital companies, but it would also apply to consumer-facing businesses where they may not have a physical presence in the place they sell products directly to consumers, such as Amazon.
Provides for a minimum tax rate that the G7 recommends should be 15%. This applies to all large businesses. If they are not taxed at this rate in a country where they declare tax, the OECD guidelines allow a separate but complementary set of rules to reallocate those taxing rights to another state. Essentially, this is a safety net to make sure multinational companies doing business around the world always pay a minimum level of taxation.