This is one of the biggest tax reforms in global corporate tax taking place over the last century. If the tech rule is applicable, some of the world’s biggest companies will end up paying a 15% minimum global tax. This can probably reduce the impact of companies selecting tax haven destinations.
Over the last week, finance ministers of the G7 group of nations met in London. The G7 countries have announced a historic tax deal for global corporations. This is the first major change in the international tax system since the agreements made at the League of Nations in the 1920s.
Under the new agreement, the G7 nations have announced a minimum corporate tax of 15%. This is an attempt to plug the gaps in the international tax system that some multinational corporations have been exploiting. The new reforms shall likely affect some of the largest companies in the world with a minimum of 10% profit.
Thus, there will be no more tax haven locations for giants like Facebook Inc (NASDAQ: FB), Google LLC (NASDAQ: GOOGL), Amazon.com Inc (NASDAQ: AMZN), and Apple Inc (NASDAQ: AAPL). Irrespective of their physical presence, these companies will have to pay more taxes where they make more money.
“G7 finance ministers today, after years of discussions, have reached a historic agreement to 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,” said the UK Finance Minister Rishi Sunak making the announcement on Saturday, June 5.
🚨 At the @G7 in London today, my finance counterparts and I have come to a historic agreement on global tax reform requiring the largest multinational tech giants to pay their fair share of tax in the UK.
— Rishi Sunak (@RishiSunak) June 5, 2021
Further details of this new agreement shall arrive soon. In case it’s finalized, it shall represent a significant development in global taxation. The joint statement from all the G7 finance Ministers read:
“We commit to reaching an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises”.
Is the Common Global Tax System Offered by G7 a Fair Reform?
By proposing a global tax system, US Treasury Secretary Janet Yellen said that it would “ensure fairness” for all people of the world. “That global minimum tax 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,” she tweeted.
The Joe Biden administration had initially proposed a minimum 21% tax rate. This high rate was probably to prevent countries from luring businesses with low tax offerings. Introducing a common global tax system would certainly be beneficial for the G7 economies. However, is it a fair system for other players within the ecosystem?
Biden’s idea hasn’t been received with the same enthusiasm elsewhere as in the US Even the UK was skeptical earlier to voice its support for the same. Even within the European Union, different countries have different tax structures. Lower tax nations attract corporations to scale and expand their economies. However, if a common global tax is applicable, this leverage shall no longer be available to other developing nations.
Interestingly, some of the big tech corporations like Facebook and Google have reacted positively to the new G7 tax rule.
“Facebook has long called for reform of the global tax rules and we welcome the important progress made at the G7. Today’s agreement is a significant first step towards certainty for businesses and strengthening public confidence in the global tax system,” wrote Facebook’s VP of global affairs Nick Cleg.
Bhushan is a FinTech enthusiast and holds a good flair in understanding financial markets. His interest in economics and finance draw his attention towards the new emerging Blockchain Technology and Cryptocurrency markets. He is continuously in a learning process and keeps himself motivated by sharing his acquired knowledge. In free time he reads thriller fictions novels and sometimes explore his culinary skills.