The G7 tax agreement on global corporations still needs formal approval from a wider set of countries, and there remain many details to be worked out for it to be effective. Nonetheless, it would not be farfetched to describe the deal as historic. On June 5, the world’s leading economies announced an agreement that will bolster their ability to raise taxes on global corporations.
What is it?
The G7 agreement has two planks. First, it proposes a global minimum tax of 15% on the largest corporations. Second, a portion of these corporations’ global profits will be clawed back to countries where they do business, regardless of the location of their physical headquarters.
These objectives are as clear an indication as any that globalisation’s rules – under which countries must compete to offer global corporations ever-sweeter deals – are being re-written. Until very recently, it was opposition by the United States that stalled global tax harmonisation. Now, by contrast, it was President Joe Biden’s administration that pushed the deal.
Since the race to the bottom in corporate taxation began in the 1980s, the average statutory rate has come down from nearly 50% to around 24% in 2020. Many countries have generous loopholes and exemptions that reduce the effective tax rate to single digits. Even more damaging, global corporations have been able to shift profits to pure tax havens such as the British Virgin Islands, the Cayman Islands, or Bermuda, without having to move any of their actual operations there. Estimates by Gabriel Zucman of the University of California, Berkeley, reveal that an inordinate share of US corporations’ foreign profits are booked in such tax havens, where they employ only a few people.
Leaving questions about administrative feasibility aside, the new agreement might face two opposing objections. Tax-justice advocates will criticise the global minimum of 15% as too low, while many developing countries will decry the global minimum as an unwarranted restriction that will impede their ability to attract investment. The deal struck by the G7 appears to reflect both sets of concerns: the low threshold could assuage developing countries’ concerns, while the global apportionment of profits will enable high-tax jurisdictions to recoup some of their lost revenues.
More from the Mint on the subject of tax: