G7 Tax Accord is a Game-changing Opportunity

G7 tax accord is a game-changing opportunity,

Reprinted from the FT – 07/05/2021

The proposed model is imperfect, but a lot better than the system today. UK chancellor Rishi Sunak and US Treasury secretary Janet Yellen meet ahead of the G7 summit. The deal they have struck with other finance ministers overturns a century of tax practice. For four decades, global corporate tax rates have fallen in an international “race to the bottom”, allowing big multinationals to reduce their burden by funneling profits through low-tax jurisdictions.

This weekend’s deal between G7 finance ministers offers a game-changing opportunity to reverse that process — and ensure companies are visibly making a fair contribution to the post-pandemic recovery. For it to succeed, the world’s largest economies more broadly will need to sign up. But it is in their own interest to do so. The accord overturns a century of tax practice, where profits are taxed only where companies have a physical presence. Instead, any countries where the world’s largest and most profitable businesses have sales would have taxing rights over “at least 20 per cent of profit exceeding a 10 per cent margin”.

Finance ministers also committed to a global minimum tax of at least 15 per cent, on a country by country basis. The agreement also represents a revival of multilateral co-operation and constructive US leadership after the Trump years — even if it suits the Biden administration’s efforts to fund its spending plans by raising its domestic corporate tax rate. US companies could otherwise have made further moves to tax havens.

If implemented, the accord lifts the threat of US tariffs against European countries planning unilateral taxes on US tech giants. Any compromise has imperfections and disappointments. Cross-border profit reallocation for tax purposes will be confined to the 100 largest global companies, and those making “super” profits. Yet even that limited scope will capture many of the US tech giants targeted by the Europeans.

The 10 per cent margin will require complex rules to be defined and agreed. The one-fifth of profits above that level open to international taxation will be relatively small, though it will be an improvement on the situation today.

And what is crucial is the shift in principle to allow taxation by countries where companies have sales, not just where they are based. More can potentially be built on this foundation in the future.

The 15 per cent global minimum tax is well below the 21 per cent the Biden administration proposed in April; campaign groups say it is too low. But the “at least” formulation allows countries to adopt higher rates. Vital, too, is the agreement to apply it “on a country by country basis”.

That means companies cannot pay an average minimum rate by routing some profits through higher-tax countries and some through zero- or low-tax regimes. Instead, if a business paid less than the minimum in any individual country, its home country could make up the difference to reach the global floor or whatever that country had legislated for.

If enough large economies agreed to do the same, there would be no incentive for companies to put business through low-tax locations. Tax havens would have no effective power of veto, and the zero-tax business model would collapse. An agreement at G20 level might be enough to achieve this — but the “country by country” provision would have to remain in the deal. These rules make sense for big economies to embrace, including the two largest. China might balk at its own multinationals having to pay some tax elsewhere. But it is in its own interest to receive revenues from, say, Apple, and to have a stable global tax system.

For the US, too, giving up some tax revenue from American corporates abroad can open the way to collect much more from them at home — reluctant Republicans in Congress take note. No one wins from a Wild West tax system where everyone is trying to make gains at another’s expense. The chance to reform that system should not be lost.