On June 5, finance ministers from the G-7 countries (the United States, Japan, Germany, Britain, France, Italy and Canada) reached a milestone agreement to impose a new global minimum corporate tax of at least 15 percent.
The levy would impact the largest of 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.
U.S. Treasury Secretary Janet Yellin has been calling for the introduction of such a minimum for some time, in an effort to slow the race to the bottom on corporate tax rates. Yellin notes that the Biden administration has already announced plans for bold domestic action, which include raising the U.S. minimum tax rate, and is in the process of renewing its international engagement with other countries, which she says is vital to ending the pressures of tax competition and corporate tax base erosion. Yellin argues that such a rate could be used to ensure that the global economy thrives based on a “more level playing field in the taxation of multinational corporations, and spurs innovation, growth and prosperity.”
How will the global minimum tax work?
The new rate minimum would apply to overseas profits of large multinational companies. Governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could “top up” their taxes to the agreed minimum rate, thus eliminating the advantage of shifting profits to a tax haven.
The Biden administration has said it wants to deny benefits for taxes paid to countries that do not agree to a minimum rate.
Next steps
While this is an unprecedented milestone, the next big step is to get the G-20 nations to agree to the minimum rate. Yellin says the U.S. is working toward that accord, and notes that interplay with the European digital services tax will also need to be addressed.
Given the number of countries involved, it remains to be seen how this type of sweeping agreement will be finalized. The G-7 nations do exert significant influence and they’ll be pushing to obtain a similar agreement from the rest of the G-20. The pact is, in principle, aligned with the OECD framework on base erosion and profit shifting and, as such, the OECD welcomed the G-7 announcement as a step toward every company paying its “fair share” of taxes.
