G-7 reaches Historic Agreement on a Global Tax Reform

07 Jun 2021 · 3rd Party Analysis

G-7 Nations Reach a Historic Agreement on a Global Tax Reform

WRITTEN BY ThorFX

In Summary

  • Finance chiefs of the G-7 strike a landmark deal on a global minimum tax rate of 15%
  • Many hurdles yet to be overcome if the solution is to be applied globally

The finance ministers of the Group of Seven, the leading and developed countries, have agreed to back a US proposal that calls for a global minimum tax rate on earnings of at least 15%. That became clear over the weekend during the meeting between the finance ministers of members of the G-7, which include Canada, France, Germany, Italy, Japan, the UK, and the US.

“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,” the statement from the G-7 finance ministers says. “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,” it also mentions.

The agreement between the treasury chiefs of the G-7 would provide a boost for the forthcoming talks in Paris which will include representatives of 135 countries. Before that, finance ministers from the G-20 are expected to meet in Venice in early July and discuss the introduction of a global minimum tax rate.

Tax History in the Making

According to the historic deal reached over the weekend, businesses from the G-7 should pay a minimum tax rate of at least 15% in each country they operate. For large tech companies, such as Google, for instance, that would mean they will have to pay 15% on earnings in any country part of the agreement.

“Just because their business is online doesn’t mean they should not pay taxes in the countries where they operate and from which their profit derives,” the treasury heads of France, Germany, Italy, and Spain said in a joint statement Friday. “Physical presence has been the historical basis of our taxation system. This basis has to evolve with our economies gradually shifting online.”

“G-7 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,” UK Finance Minister Rishi Sunak commented after the landmark deal was announced.

Treasury Secretary Janet Yellen, who recently stepped up efforts to heap pressure on the most advanced economies to embrace a global tax rate, praised the achievement. “The G-7 finance ministers have made a significant, unprecedented commitment today that provides tremendous momentum towards achieving a robust global minimum tax at a rate of at least 15%,” she said.

The proposal, however, is likely to face significant hurdles before becoming part of the global taxation system. For the rules to be applied globally, the plan would need support from the Group of 20, which includes China, India, and the EU. Some European countries have corporate taxes below 15% and a refusal by one of them could derail international efforts to overhaul the tax rules. Ireland, as the European host of a number of leading technology companies, has a tax rate of 12.5%, making the country a preferred place for foreign investors.

“Any agreement will have to meet the needs of small and large countries, developed and developing,” Irish Finance Minister Paschal Donohoe said in a tweet on Saturday about the announced G-7 deal.

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