G7 countries agree on broad principles of minimum corporate tax deal

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The Group of Seven (G-7) has agreed on a landmark deal on taxing multinational companies at a minimum global corporate tax rate of 15 percent. Finance ministers of the US, UK, Germany, France, Canada, Italy and Japan propose that companies pay a tax in the countries where they operate rather than where they are headquartered. This is a broad-based agreement where the nitty-gritty of how the taxes will be determined and on what basis has still to be worked out.

G7 Summit Global Minimum Corporate Tax

G7 finance ministers said in a final communique that they would “commit to a global minimum tax of at least 15 percent on a country by country basis.”

“Today G7 Finance Ministers and Central Bank Governors chaired by Chancellor Rishi Sunak agreed a landmark deal on global tax, and ways to build a strong, sustainable, balanced and inclusive global economic recovery,” the G7 said in a tweet.

G7 Corporate Tax Reform: Rich nations back deal to tax multinationals

Global companies have tried to circumvent paying high taxes and saving billions of dollars by shifting jurisdictions. Major digital companies are making money in multiple countries and pay taxes only at home. Or some have even registered companies where they are required to pay a minimal tax to save on profits.

G7 Global Minimum Corporate Tax Deal

Action Aid: “Facebook, Google and Microsoft avoiding $3 billion in tax in poorer nations.”

Under the proposal, countries where the products of big companies are consumed, will have a right to tax 20% of profits above a margin of 10%. However, garnering wider support will not be easy.

The deal aims to modernize the old global tax structure and find some solution for trade wars that break out similar to what happened between China and the US.

 

If adopted widely, the G7 tax plan could reduce the incentive for companies to set up subsidiaries in tax havens.

 

US Treasury Secretary Janet Yellen, a great proponent of the proposal, said the global minimum tax would end the “race-to-the-bottom” in corporate taxation. She said it would help countries to compete on a level field.

“I am delighted to announce that the G7 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,” said Rishi Sunak, Britain’s Chancellor of the Exchequer, on Twitter.

However, garnering wider support will not be easy, and full implementation could take years.

More confusion, less clarity on G7 corporate tax deal

Countries that are acting as tax havens for these companies and are benefiting form their support are not happy about the tax. Ireland, which has a tax rate of 12.5 percent, has come out against the global minimum tax, arguing that it would be disruptive to its economic model.

The companies most affected by this deal could be the 100 largest corporations of the world. In this, also the ten biggest tech copies such as Amazon, Facebook, Apple and Google, Berkshire Hathaway and the Arab Oil Company will be making the maximum payouts.

However, measures other than market cap could be used to identify the biggest companies, and lobbyists say they expect some sectors to be excluded from the list. Most likely, agriculture and infrastructure biggies will be exempted.

The 15 percent tax proposal is about each country passing laws to ensure that companies headquartered there pay that minimum tax.  Companies that paid less would make up the difference to their home countries.

If adopted widely, such a rule could reduce the incentive for companies to set up subsidiaries in tax havens. In the last five years, only about 25 to 30 companies have reported effective tax rates of less than 15% among the 100 biggest companies by market capitalization, according to data from S&P Global Market Intelligence.

 

Under the G7 tax plan, nations where the companies’ products are consumed would have the right to tax 20% of profits above a margin of 10%.

 

A plus for the tech companies that are likely to be affected by this tax deal is that they would not have to pay the special digital tax imposed by France, Italy and the UK. The G-7 committed to the coordinated removal of such taxes as part of its deal.

Tech companies are ready to pay a higher tax if it helps do away with these piecemeal impositions.

“We want the international tax reform process to succeed and recognize this could mean Facebook paying more tax, and in different places,” Nick Clegg, the company’s vice president of global affairs, said on Twitter.

The 15 percent minimum tax is sound on paper, but in actual fact, questions arise about, 15% of what?

Most of these big companies declare taxes based on their earnings in different entities. Apple reported an effective global tax rate of 14.4% on financial-statement profits for the year ended Sept. 26, 2020, from earnings in countries with lower tax rates. Facebook reported a 12.2% effective tax rate for the year ended Dec. 30, 2020.

Assuming a 15 percent rate prevails, everything would depend on how each country implements it, said Friedemann Thomma, international tax chair for law firm Venable LLP. “In my mind, this proposal is not revolutionary, does not change our thinking for multinationals, and I don’t think it will move the needle with regard to the effective tax rate of global companies,” Mr. Thomma said. “It will all depend on the ultimate implementation of that broad principle.”

The post G7 countries agree on broad principles of minimum corporate tax deal appeared first on Industry Leaders Magazine.

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