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G-7 to deter tax dodging by multinationals

·3-min read

The Group of Seven wealthy democracies have agreed to support a global minimum corporate tax of at least 15 per cent to deter multinational companies from avoiding taxes by stashing profits in low-rate countries.

G-7 finance ministers meeting in London also endorsed proposals to make the world's biggest companies - including US-based tech giants - pay taxes in countries where they have lots of sales but no physical headquarters.

British Treasury chief Rishi Sunak, the host, said the deal would "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."

US Treasury Secretary Janet Yellen said the agreement "provides tremendous momentum" for reaching a global deal that "would end the race-to-the-bottom in corporate taxation and ensure fairness for the middle class and working people in the US and around the world."

Nations have been grappling for years with the question of how to deter companies from legally avoiding paying taxes by using accounting and legal schemes to assign their profits to subsidiaries in tax havens - typically small countries that entice companies with low or zero taxes, even though the firms do little actual business there.

International discussions on tax issues gained momentum after US President Joe Biden backed the idea of a global minimum of at least 15 per cent - and possibly higher - on corporate profits.

The meeting of finance ministers came ahead of an annual summit of G-7 leaders scheduled for June 11-13 in Cornwall, England. The endorsement from the G-7 could help build momentum for a deal in wider talks among more than 135 countries being held in Paris as well as a Group of 20 finance ministers meeting in Venice in July.

The tax proposals endorsed Saturday have two main parts. The first part lets countries tax a share of the profits earned by companies that have no physical presence but have substantial sales, for instance through selling digital advertising.

France had launched debate over the issue by imposing its own digital services tax on revenues it deemed to have been earned in France by companies such as Google, Amazon and Facebook. Other countries have followed suit. The US considers those national taxes to be unfair trade measures that improperly single out American firms.

Part of the agreement Saturday is that other countries would repeal their unilateral digital taxes in favour of a global agreement.

Facebook said the deal is a big step toward increasing business certainty and raising public confidence in the global tax system but acknowledged it could cost the company.

The G-7 statement echoes a US proposal to let countries tax part of the earnings of the "largest and most profitable multinational enterprises - digital or not - if they are doing business within their borders. It supported awarding countries the right to tax 20 per cent or more of local profits exceeding a 10 per cent profit margin.

Yellen, asked if she had given her European counterparts assurances that large US tech firms would be included, said the agreement "will include large profitable firms, and I believe those firms will qualify by almost any definition."

The other main part of the proposal is for countries to tax their home companies' overseas profits at a rate of at least 15 per cent. That would deter the practice of using accounting schemes to shift profits to a few very low-tax countries because earnings untaxed overseas would face a top-up tax in the headquarters country.

At home, Biden is proposing a 21 per cent US tax rate on companies' overseas earnings, an increase from the 10.5 per cent to 13.125 per cent enacted under former president Donald Trump.

Even if the US rate winds up higher than the global minimum, the difference would be small enough to eliminate most room for tax avoidance. Biden's proposal requires congressional approval.