The G7 tax agreement is a “stepping stone” on the road to global reform

The tax deal agreed by the world’s leading developed nations this weekend is the first substantive evidence of a revival of international cooperation since President Joe Biden brought the United States back to the negotiating table. However, we still have a long way to go before it can be implemented.

“This is a starting point,” said French Finance Minister Bruno Le Maire, vowing that “in the coming months we will fight to ensure that the minimum corporate tax rate is as high as possible.”

The agreement aims to close loopholes that multinational companies have exploited to reduce their tax bills, and ensure that they pay more in the countries in which they operate.

The G7 ministers endorsed a global minimum of at least 15 per cent, and agreed that countries should have the right to tax a certain percentage of the profits of the largest and most profitable multinational corporations in the locations where they are earned.

However, they leave much to be decided in the broader global negotiations, which are taking place among 139 countries at the Organization for Economic Co-operation and Development in Paris. The first obstacle facing the G7 agreement is winning the support of the Group of 20 nations, which will meet in Venice next month.

While the Organization for Economic Cooperation and Development Estimates The proposals could generate between $50 billion and $80 billion annually in tax revenue, and the actual amount collected would vary widely depending on the technical details of the final global agreement.

Two factors have a special effect: the rate at which any minimum is set and whether countries that apply the minimum can impose it on revenue generated in countries that do not. The scale of the overall impact is particularly sensitive to this last point, known as “judicial blending” or “state-to-state transshipments.”

NGOs criticized the minimum 15 percent as being too low; It “would not be enough to end the race to the bottom,” the British research institute IPPR said.

But Gabriel Zucman, an economist at the University of California, Berkeley known for his work in tax havens, tweeted that the deal was “historic, inadequate and promising” — because while 15 percent was too low, there was no impediment to a higher rate.

He said the minimum rate “reduces incentives for multinationals to make profits in tax havens,” but added that for the bottom line, it “must be on a country-by-country basis”, as companies can use tax havens to offset the higher rates set. than 15 percent elsewhere.

Ministers and officials at the G7 talks were struggling to stress that their agreement did not mean the world agreed to changes to international taxation, let alone that the plan would eventually succeed. Instead, they framed it as an ambitious attempt to instill momentum in global conversations.

Other countries have recognized this. Irish Finance Minister Pascal Donohoe joined the G7 ministers in London, although he defended his country’s 12.5 per cent.

After the announcement, he tweeted: “I am now looking forward to participating in discussions at [the] Organization for Economic Cooperation and Development. . . Any agreement must meet the needs of countries small and large, developed and developing.”

The Organization for Economic Co-operation and Development estimates that the $1 billion per year bar graph shows that global tax reform for corporations can generate billions in revenue for governments.

Global talks must reconcile countries’ competing priorities on two components known as “pillars”.

The first, and most important to the UK, France and Italy, seeks to ensure that the world’s largest companies – especially US digital giants Facebook, Google and Apple – pay more taxes in their countries even if they have little physical presence there.

Rishi Sunak, Britain’s finance minister, said the G7 agreement ensures that “the right companies pay the right tax in the right places,” referring to the first pillar.

By contrast, US Treasury Secretary Janet Yellen did not mention this in her prepared remarks, focusing on the second pillar: a global minimum rate of “at least 15 percent.” This would generate more revenue for the federal government in Washington.

The first requires a global agreement and US legislation that must pass through Congress, while the second – which the Organization for Economic Co-operation and Development estimates will raise most of the additional revenue – can be implemented unilaterally, but will work better if many countries join in.

The first pillar faces stiff opposition in Washington. France, Italy, and the United Kingdom refuse to scrap their digital taxes until the United States passes relevant legislation. Canadian Finance Minister Chrystia Freeland said after the G7 agreement was announced that her country intends to move forward with the introduction of a digital tax as well.

Besides these initial issues, there are still many unanswered technical questions that can make a big difference to the practical implications of a definitive agreement – including which companies it falls within its scope, and how the tax base is determined.

While key rates are important, competition at the tax base level is likely to continue. “This could be more chaotic,” said Rita de la Feria, professor of tax law at the University of Leeds.

When asked how the deal would sell to US lawmakers, Yellen said it would “provide a level of certainty to companies in the United States and globally about the environment in which they will operate and that this environment has been very unstable.”

Which praised the Reviving pluralism.

Some ministers privately said the urgent need for a deal at the G7 is to show that rich countries still matter, in an effort to show the world that the 21st century will not be dominated by rules set by China.

Both in public and in private, ministers have said the West is seeking to regain control of the global agenda by striking deals in controversial policy areas after four years of the Trump administration when that was impossible.

“What I saw during my time in G7 [meeting] It is a deep collaboration and a desire to coordinate and address a much broader range of global problems,” Yellen said.

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