Justifying the significance of a global tax

Major consequences for low tax countries

08 June 2021 | Economics

LEIGH THOMAS AND DAVID LAWDER

Finance Ministers from the Group of Seven (G7) rich nations reached a landmark accord on Saturday backing the creation of a global minimum corporate tax rate of at least 15%, an agreement that could then form the basis of a worldwide deal.

Such a deal aims to end what US Treasury Secretary Janet Yellen has called a "30-year race to the bottom on corporate tax rates" as countries compete to lure multinationals.

Major economies are aiming to discourage multinationals from shifting profits and tax revenues to low-tax countries regardless of where their sales are made.

Increasingly, income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to these jurisdictions, allowing companies to avoid paying higher taxes in their traditional home countries.

The G7 accord feeds into a much broader, existing effort. The Organization for Economic Cooperation and Development (OECD) has been coordinating tax negotiations among 140 countries for years on rules for taxing cross-border digital services and curbing tax base erosion, including a global corporate minimum tax.

The OECD and G20 countries aim to reach consensus on both by mid-year, but the talks on a global corporate minimum are technically simpler and less contentious.

Minimum rate

If a broad consensus is reached, it will be extremely hard for any low-tax country to try and block an agreement. The minimum is expected to make up the bulk of the US$50 billion-US$80 billion in extra tax that the OECD estimates firms will end up paying globally under deals on both fronts.

Governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could "top-up" their taxes to the minimum rate, eliminating the advantage of shifting profits.

The OECD said last month that governments broadly agreed on the basic design of the minimum tax but not the rate. Tax experts say that is the thorniest issue, although the G7 accord creates strong momentum around the 15%-plus level.

Other items still to be negotiated include whether investment funds and real estate investment trusts should be covered, when to apply the new rate and ensuring it is compatible with US tax reforms aimed at deterring erosion.

A G20 meeting scheduled for Venice next month will see whether the G7 accord gets broad support from the world's biggest developing and developing countries. - Nampa/Reuters