G7 global corporate tax agreement

World leaders dress up hardnosed tax grab as progressive

G7 finance ministers met in London last month, where a plan for a reform of global corporate taxation received preliminary approval. However, the details of the agreement that have come to light so far mean smaller and less developed nations have every right to be sceptical about the G7’s new framework for corporate taxation.

This is especially true for the global minimum corporate tax rate, as these proposals, should they ever become a reality, will largely benefit the G7. The minimum corporation tax rate means that if a company locates some operations in a particular country (Ireland, for example) with a low corporate tax rate, their “home” governments can still “top-up” the taxes the company pays to them until they hit the agreed minimum rate, eliminating the advantage of shifting profits to the low tax jurisdiction.  Of course, the G7 nations are “home” to most of the multinationals that will be affected by this tax reform. For example, the US treasury will reap the benefits when US multinationals have a presence in Ireland where the 12.5% rate is lower than the proposed global minimum rate.

The proposed G7 plan is based on the existing Organisation of Economic Cooperation and Development (OECD) proposals for corporate tax reform, which is aimed at creating a unified global corporate tax system where multinational businesses are taxed where profits are earned, regardless of physical presence.

The OECD proposals are aimed at helping every nation where a multinational has no physical presence and where that nation currently has no recognised international basis on which to charge tax on the value that multinational creates. To achieve this objective, the proposals will overhaul two long-standing principles of international taxation: the physical presence principle and (to some extent) the arm’s length principle. The proposed new rules will create a right to tax where there is a ‘sustained’ and ‘significant participation’ by a company in a market jurisdiction (determined by revenue thresholds, sales and in more limited circumstances by physical presence).

While the US presents its minimum global tax rate proposal as part of this broader goal, it might be doing little more than dressing up a post-pandemic revenue raising exercise in progressive principle. Biden’s proposals could go very well with what the OECD’s current suggestions and prevent companies from exploiting loopholes to avoid paying their fair share of taxes. Dig deeper and there is at least a suspicion the US and other G7 nations are seeking specific advantages from this. At the very least, this is a question we should ask when more details on President Biden’s proposals emerge.

Only when more details of the US administration proposals are made public, we will be able to assess how they fit in the broader OECD plans.

It is important to keep in mind that every nation is trying to increase tax revenues because of the economic impact of the Covid-19 pandemic. The US proposals might create an environment where major economies are able to use the minimum rate to further increase home tax revenues. A lot will still revolve around the rights of the governments where corporations are headquartered. Evidently, if they are given a big role in enforcing the minimum tax rate, the proposal could start to look quite self-serving.

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