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Business Banking & Insurance

G-7 strikes historic deal to revamp global tax on tech firms

The deal to jointly support a minimum corporate tax rate of at least 15 per cent



The world’s richest governments entered a second day of talks in London seeking to pave the way toward a historic rewrite of the tax code for international business.
Image Credit: AFP

London:  The Group of Seven advanced economies agreed the outline of a global deal on taxation that could give governments greater rights to tax U.S. tech giants and set a floor for corporate rates around the world.

The pact at a meeting of G-7 finance ministers in London smooths transatlantic tensions that have for years undermined negotiations to update century-old rules for the 21st century economy. It paves the way for a broader accord by the Group of 20 as early as next month.

"That global minimum tax would end the race-to-the-bottom in corporate taxation, and ensure fairness for the middle class and working people in the U.S. and around the world," U.S. Treasury Secretary Janet Yellen said in a statement after the talks in London on Saturday.

The UK Treasury said on Twitter that the deal: The aim is to stop multinational firms shifting profits to lower their tax bills, make them pay more in countries where they operate, and adapt the system to cope with trade in intangibles like data and information.

A statement following the G-7 meeting didn't mention any commitment to tax digital companies, focusing only on big profitable multinationals. That's a victory for the US, which opposed France's bid for a digital services tax that would target tech giants like Amazon.com Inc. and Facebook Inc.

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It is "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 is fair, so that the right companies, pay the right tax in the right places," U.K. Chancellor of the Exchequer Rishi Sunak said after hosting two days of the G-7 talks.

The envoys will seek to gain the support of G-20 nations, staring with a meeting next month in Venice

"For the first time in several years, G-7 members are able to define rules for the international system of the 21st century," French Finance Minister Bruno Le Maire said. "We've been fighting for four years in all European and international forums, here at the G-7 and the G-20 for a fair taxation of digital giants and for a minimum corporate tax."

Tax sharing

While many technical details still need to be decided in the coming weeks, the G-7 on Friday signaled a breakthrough on the question of how to share the spoils of taxing tech companies.

That's always proved tricky since the US refused any ring-fencing of digital firms in the new rulebook. Yet Europeans, under political pressure from voters to make tech companies pay more, have always wanted to explicitly target digital in any new initiative.

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The issue is one of two pillars in a discussion that has lasted years at the Organization for Economic Cooperation and Development. The other aimed to set a global minimum tax so that countries can levy the profits their companies record in low-tax jurisdictions.

"The proposed changes in our international tax rules will set a new framework for many decades to come," said Melissa Geiger, head of tax policy at KPMG. "Countries and businesses need to think deeply about the changes with a long-term view."

During Donald Trump's presidency, the transatlantic division on digital issues spiraled into a battle of unilateral measures and threats of trade sanctions, which although suspended, are still in place. Yellen maintained the Trump-era position of opposing the singling out of U.S. digital companies, such as Amazon.com Inc. and Facebook Inc., though she offered a solution to tax multinationals more broadly.

The antipathy was greatest between Paris and Washington, since France was the first country to bypass the slow-going OECD process on how to tax profits, opting for a controversial levy on exclusively on the digital revenues of large firms operating.

As the US and Europe exchanged threats over the last two years, negotiators at the OECD struggled with tortuous technical solutions that would be politically palatable to both sides.

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The arrival of Joe Biden in the White House changed the situation dramatically. His administration swept away the complex system for defining which type of business would fall in scope of new rules and replaced it with a simplified approach.

The G-7 accord suggests the U.S. and Europe have found a way to square the circle so that all tech firms are included, without having to define them as such. But there were no details on exactly where to set thresholds, which will need to be resolved in talks at the OECD that next convene at the end of June.

Venice marks another opportunity for progress. While it may deliver a broad political agreement, some countries will need to first pass national legislation. The OECD has said a final deal may not come until October.

"The chances of a global deal have significantly increased," European Union Economy Commissioner Paolo Gentiloni said. "Now we must go the last mile to expand this consensus to all members of the G20 and all countries involved the OECD's inclusive framework."

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