On 5th June 2021, the G7 agreed a historic international agreement on global tax reform. Leaders of the G7 backed a deal to make multinational companies pay more tax. It was agreed companies should pay tax in each of the countries they do business in. The deal will see billions of dollars paid to governments, helping them pay off the huge debts associated with the COVID crisis.
What is the G7?
The G7 is the Group of Seven and consists of the world’s largest advanced economies. It includes the UK, United States, Japan, France, Italy, Germany and Canada. Russia was excluded in 2014 after its invasion of Crimea. Despite its large economy and the world’s largest population, China is not a member. It is not considered an advanced economy due to its low level of wealth per person.
The UK is hosting the 2021 G7 Summit in Cornwall. The key subject for 2021 will be around the recovery plan post-COVID. The Group will be tasked with building ‘a stronger global health system that can protect us all from future pandemics.” Climate change and trade will also by topics of discussion.
Why was there a need for Global Tax Reform?
There has been a continued challenge for governments to charge multinational companies tax in the country in which they operate in. This includes many of the tech giants such as Amazon and Facebook. These companies can establish local offices in countries that have low corporate tax rates and declare their profits there. This means that the company will only pay the low rate of tax there, even if profits were coming from other countries. This is perfectly legal and is common practice across the world.
The deal that has been struck aims to stop this from happening in the future.
Global Tax Agreement
Following years of discussion, the G7 Finance ministers reached an agreement in London. Rishi Sunak chaired the meeting, encouraging his fellow leaders to work together to combat the tax challenges. The deal is structured in two ways to ensure multinational companies pay an appropriate level of tax.
- Companies will pay more tax in each of the countries they are selling products or services, rather than the country they are declaring profits
- A global minimum tax rate of 15% in each of the countries in which the business operates in.
How will the agreement work?
The new rules will apply to global companies that operate with a profit margin of at least 10%. 20% of any profit above this be reallocated and taxed in the countries they do business in. The second pillar of the agreement sets a minimum corporate tax rate of 15% to ensure countries doesn’t undercut each other. The UK for example has a corporate tax rate of 19%, which is set to rise to 25% in 2023.
What happens next?
The agreement will be on the agenda at the wider G20 Meeting in July, in Venice. This will bring in the likes China, Russia and Brazil. It is essentially an ‘agreement in principle’ that needs firming up at G20 level. It is a historic moment with German Finance minister Olaf Scholz saying the tax deal would “change the world.”
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