Members of the G7 have signed a breakthrough tax reform deal, to establish a minimum global corporation tax, for the first time. The aim of the tax reform deal is to address tax avoidance by some of the world’s biggest multinational trading companies.
G7 Summit 2021
The Group of Seven (G7) is an informal club of wealthy “liberal democracies” consisting of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. The heads of government of the member states, as well as the representatives of the European Union, meet at the annual G7 Summit. This year the G7 was hosted by the UK and finished their negotiations yesterday, in Carbis Bay in Cornwall. The G7 member states collectively represent 58% of the global net wealth ($317 trillion), more than 46% of the global gross domestic product (GDP) based on nominal values, and more than 32% of the global GDP based on purchasing power parity. The seven countries involved are also the largest IMF-advanced economies in the world. Advanced economy is a term used by the International Monetary Fund (IMF) to describe the most developed countries in the world. While there is no established numerical convention to determine whether an economy is advanced, they are usually defined as having a high level of per capita income, a very significant degree of industrialisation, a varied export base, and a financial sector that’s integrated into the global financial system.
G7 Historic Multinational Tax Reform
On 6th June finance ministers agreed the tax reform deal as part of talks held in London, the chancellor, Rishi Sunak, said. The principle of the agreement is that multinationals would have to pay a minimum tax rate of at least 15% in each country they operate. US president Joe Biden initially proposed the scheme, suggesting minimum rate of 21%, but was persuaded to reduce this to 15% to make it acceptable to a wider group of countries. Critics warn that G7 has in fact let multinationals “off the hook” because a rate of 15% fails to prevent tax havens undermining countries with a higher rate of tax needed to pay for costs incurred during the pandemic. In order to manage the UK’s £300bn deficit Mr Sunak said: “These seismic tax reforms are something the UK has been pushing for and a huge prize for the British taxpayer – creating a fairer tax system fit for the 21st century. – This is a truly historic agreement and I’m proud the G7 has shown collective leadership at this crucial time in our global economic recovery.” The tax reform deal transforms several decades of beggar-thy-neighbour policies. A beggar-thy-neighbour policy is an economic policy through which one country attempts to remedy its economic problems by means that tend to worsen the economic problems of other countries. This form of tax reform is aimed at multinationals that have played countries against one another to drive down the level of tax they pay. The scheme will force the world’s biggest companies to pay more tax in the countries where they trade, as well as where they base their headquarters.
Digital Multinational Come Under Fire
Mr Sunak said the tax reform deal will force “the largest multinational tech giants to pay their fair share of tax in the UK”. Digital businesses such as Amazon, Google and Facebook, which have built huge businesses throughout the globe, yet declare only relatively small profits in each country, will also be subject to the tax reform deal declared by the G7 last weekend. Within hours of the deal, it was praised by Facebook’s vice president for global affairs, Nick Clegg, who called it “a significant first step towards certainty for businesses and strengthening public confidence in the global tax system”. “We want the international tax reform process to succeed and recognise this could mean Facebook paying more tax, and in different places,” he said. G7 leaders hope the agreement will be endorsed by the G20 group of nations, which includes China, Russia, South Africa and Saudi Arabia, later in the year while more than 130 countries are participating in a parallel exercise to agree on a global tax framework.
Critics Blast Embarrassingly Low Target
Aid charities said governments had allowed corporations to escape paying taxes for too long, denying governments funds to tackle health crises, such as the Covid-19 pandemic. With few details available showing how the new system would work, a spokesperson for Oxfam said it appeared low-tax havens would continue to operate. “It’s absurd for the G7 to claim it is ‘overhauling’ a broken global tax system by setting up a global minimum corporate tax rate that is similar to the soft rates charged by tax havens like Ireland, Switzerland and Singapore. They are setting the bar so low that companies can just step over it,” the spokesperson said. Labour’ recently appointed shadow chancellor Rachel Reeves said Britain must fight harder for the 21% proposal. “It’s encouraging to see these first moves towards a global pact on tax avoidance. But this government has spent the last few weeks watering down what was intended to be an ambitious 21% rate. “That would have brought £131m extra a week to Britain for our NHS and other public services, while also stopping our high streets being aggressively undercut.” This criticism was reflected by the Institute for Public Policy Research think tank (IPPR), which said that while a 15% rate could raise £7.9bn for the UK, a 21% rate could raise £14.7bn and the move would not be enough to end the race to the bottom on tax. George Dibb, head of the IPPR centre for economic justice, said: “With the UK corporation tax rate set to rise in 2023, the government should be demonstrating leadership and aiming for a global minimum rate of 21% or higher with the ultimate goal of around 25%.” Meg Hillier, chair of the powerful parliamentary public accounts committee, described the agreement as a “huge breakthrough”, but said it must ultimately translate into extra tax funds. “International tech companies were able to run rings around national tax systems,” she said. – The only long-term solution was for countries to work together. The devil will be in the detail and I doubt this will be the end of the necessary international action. The proof will ultimately be in the pounds paid to the exchequer and the committee will be watching this closely.” Margaret Hodge, her predecessor, was more critical. She said that “watering down” the minimum tax to 15% was “embarrassing”. Other campaigners questioned how much would be raised for the UK. George Turner, director of the Tax Watch campaign group, said: “This seems a great deal for the United States, but I struggle to see that much benefit for the UK, particularly if we are giving up [our] digital services tax.
G20 to Agree Exceptions by October
However, gaps remain in the deal, with key details still to be hammered out between the broader G20 group of countries – including China, India and Brazil – at meetings in Venice next month. The G7 tax reform deal is yet to be passed into law by both houses of Congress. However, Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics and a former chief economist at the International Monetary Fund, said an alliance of Democrats and Republicans who were upset at the treatment of former president Donald Trump by Facebook and Twitter, could come together to endorse the deal. Meanwhile Britain will seek to exclude the City of London’s financial services companies from the tax overhaul. Rishi Sunak, is concerned that under a version of the plan put forward by the US president – which involves redistributing the profits of the world’s 100 largest businesses – digital businesses will be joined by banks that he says already pay a fair share of tax. The impact of the tax reform proposal could prove to be a significant deterrent to banks running many of their operations from London, compounding the impact of Brexit that resulted in a shift of financial trading to Amsterdam. These variations to the G7 tax reform deal will be negotiated between 139 countries in a process overseen by the Organisation for Economic Cooperation and Development, with the aim of reaching a final agreement by October 2021.
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