G7 deal on minimum global corporate tax: Reason, likely impact explained

Agreement paves way for levies on multinationals in countries where they operate, instead of just where they are headquartered.

The Group of seven (G-7) advanced economies on June 5 secured a landmark deal on taxing multinational companies as per which the minimum global tax rate would be at least 15 per cent.

The agreement by finance ministers of US, UK, Germany, France, Canada, Italy and Japan paves way for levies on multinationals in countries where they operate, instead of just where they are headquartered.

 
Here are key facts to know about the proposed global taxation system.

Why the change

Several critics have argued over the years that the global taxation system allowed big companies to save billions of dollars in tax bills by shifting jurisdictions, reported Bloomberg. Major digital companies are making money in multiple countries and pay taxes only at home.

A 'New York Times' report said the agreement would impose an additional tax on some of the largest multinational companies, potentially forcing technology giants like Amazon, Facebook and Google as well as other big global businesses to pay taxes to countries based on where their goods or services are sold, regardless of whether they have a physical presence in that nation.

It however, said garnering wider support will not be easy.

Under the new agreement, countries where big firms operate would get the right to tax at least 20% of profits exceeding a 10% margin which would apply to the largest and most profitable multinational enterprises.

The deal is aimed at modernizing the century-old international tax code and cools transatlantic tensions that threatened to spill into a trade war under Donald Trump, the report added.

Stakeholders' take

US Treasury Secretary Janet Yellen said on Twitter global minimum tax would end the race-to-the-bottom in corporate taxation, and help the global economy thrive, by levelling the playing field for businesses and encouraging countries to compete on positive bases, such as educating and training their work forces and investing in research and development and infrastructure.

"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.

"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, in a video clip posted on Twitter.

Implementation

Key details still need to be deliberated upon, more nations must sign on. According to the report, full implementation could take years.

The decision would be placed before the G-20 countries, a group of developing and developed nations, in a meeting scheduled for July in Venice.

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. Some major countries such as China have been quietly tracking the proceedings but are considered unlikely to buy in.

Finance officials believe that if enough advanced economies sign on, then other countries will be compelled to follow suit and they plan to exert political pressure on Ireland to join the agreement, the NYT report said.

Possible Impact on India

According to a PTI report, tax experts are of the view that India is likely to benefit from the global minimum 15 per cent corporate tax rate pact inked by the world's richest nations as the effective domestic tax rate is above the threshold, and the country would continue to attract investment.

Consulting firm AKM Global Tax Partner Amit Maheshwari told PTI India is expected to benefit as it is a big market for a large number of tech companies.

"It remains to be seen how the allocation would be between market countries. Also, the global minimum tax of at least 15 per cent means that in all probability the concessional Indian tax regime would still work, and India would continue to attract investment," Maheshwari added.