The tax deal struck by the world’s major advanced economies this weekend is the first substantial evidence of relaunched international cooperation since President Joe Biden brought the United States back to the negotiating table. Yet there is still a long way to go before it can be implemented.
“This is a starting point,” said French Finance Minister Bruno Le Maire, promising that “in the coming months, we will fight for this minimum corporate tax rate to be as high as possible”.
The deal aims to close loopholes multinationals have exploited to lower their tax bills, by ensuring they pay more in the countries where they operate.
G7 ministers supported a global minimum rate of at least 15% and agreed that countries should have the right to tax a certain proportion of the profits of the largest and most profitable multinationals where they are generated.
However, there is still a lot to be decided in the broader global negotiations, which are being conducted between 139 countries at the OECD in Paris. The first hurdle the G7 deal faces is winning the support of the G20 group of nations, which will meet in Venice next month.
While the OECD estimates the proposals could generate an additional $ 50-80 billion per year in tax revenue, the actual amount raised will vary widely depending on the technical details of the eventual global deal.
Two factors will have a particular impact: the rate at which any minimum is set and whether countries that apply the minimum can levy it on income generated in countries that do not. The magnitude of the overall impact is particularly sensitive to this last point, called “jurisdictional mix” or “additional country by country”.
NGOs criticized the 15 percent minimum as far too low; UK think tank IPPR said “that would not be enough to end the race to the bottom.”
But Gabriel Zucman, an economist at the University of California at Berkeley, known for his work on tax havens, tweeted that the deal was “historic, inadequate and promising” – because if 15% was too low, there had no barrier to reaching a higher rate goal.
The minimum rate “reduces the incentives for multinational companies to register profits in tax havens,” he said, but added that for the minimum to be valid, “it is essential that it is country by country” because companies could otherwise use tax havens to offset rates set elsewhere.
Ministers and those responsible for the G7 talks struggled to stress that their deal did not mean the world had agreed to changes to international taxation, let alone that the plan would ultimately succeed. Instead, they touted it as an ambitious attempt to inject momentum into the global talks.
This has been recognized by other countries. Irish Finance Minister Paschal Donohoe joined G7 ministers in London, despite defending his country’s 12.5% rate.
After the announcement, he tweeted: “I now look forward to participating in the discussions at [the] OECD. . . Any agreement will have to meet the needs of countries large and small, developed and developing.
Global talks must reconcile the competing priorities of countries on two elements, called “pillars”.
The first, the largest for the UK, France and Italy, aims to ensure that the world’s biggest companies – especially US digital giants Facebook, Google and Apple – pay more taxes in their own countries. if they have little physical presence there.
Rishi Sunak, British Chancellor, said the G7 agreement ensures that “the right companies pay the right tax in the right places”, a reference to the first pillar.
In contrast, US Treasury Secretary Janet Yellen did not mention it 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 former requires a global deal and US legislation that must go through Congress, while the latter – which the OECD estimates will generate the most additional revenue – can be implemented unilaterally, but would work better if many countries joined.
The first pillar faces vigorous opposition in Washington. France, Italy and the UK refuse to abolish their own digital taxes until the US has passed the relevant legislation. Canadian Finance Minister Chrystia Freeland said after the G7 deal was announced that her country also intends to move forward with the introduction of a digital tax.
Beyond these questions of principle, there remain many unanswered technical questions that could make a big difference to the practical effects of a possible agreement – including which companies would fall within its scope and how to set the base. fiscal.
“Although interest rates are important, competition should continue on the tax base. It can be more complicated, ”said Rita de la Feria, professor of tax law at the University of Leeds.
When asked how she would market the deal to U.S. lawmakers, Yellen said it would “provide a level of certainty for businesses in the United States and around the world as to the environment in which they will operate and that environment. has been very unstable ”.
And she greeted the “Revival of multilateralism”.
Privately, some ministers have said the urgency of reaching a deal at the G7 is to demonstrate that rich countries still matter, in a bid to show the world that the 21st century is not going to be ruled by the rules set by the China.
The West is seeking to regain control of the global agenda by making deals in contentious policy areas after four years of Trump administration when it was impossible, ministers have said in public and in private.
“What I saw during my stay at this G7 [meeting] is a deep collaboration and a desire to coordinate and solve a much wider range of global issues, ”Yellen said.