G7 finance ministers' meeting held in Buckingham on June 5, 2021 (Image: AP)
The Group of Seven (G7) countries have backed the proposal to impose a common global corporate tax, which would be aimed at preventing multinational businesses from evading taxes and also squeeze the havens which attract tax evaders due to the low-rate jurisdictions.
The consensus to adopt a common tax rate was reached at the G7 finance ministers' meeting held in Buckingham on June 5, under the convenorship of Britain's Chancellor of the Exchequer Rishi Sunak.
Sunak, while making the announcement following the meeting, said the seven advanced economies have agreed 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".
What the proposal exactly means?
The tax proposal endorsed by the US, the UK, France and other G7 countries has two parts. The main part of the proposal states that countries around the world should tax their home companies' overseas profits at a rate of at least 15 percent.
This 15 percent of global minimum corporate tax would deter the practice of using accounting schemes to shift profits to a few very low-tax countries.
The companies involved in tax evasion use the above modus operandi. With multiple branches spread across various jurisdictions, they transfer the bulk of their profit in accounts set up in countries that offer the lowest tax rate.
Often, these tax havens are the Caribbean Islands such as Bahamas or British Virgin Islands, or at times, countries like Ireland where the corporate tax rate is as low as 12.5 percent -- lower than the proposed minimum rate of 15 percent.
The second part of the proposal which the G7 countries have adopted allows countries to tax a share of the profits earned by companies "that have no physical presence but have substantial sales", for instance through selling digital advertising.
The G-7 statement echoes a US proposal to simply let countries tax part of the earnings of the largest and most profitable companies — digital or not — if they are doing business within their borders. It also supported awarding countries the right to tax 20 percent or more of profit exceeding a 10 percent profit margin.
How will it impact firms like Amazon, Facebook and Google?
The part of G7 proposal that stresses that countries would tax a share of the profits earned by companies with no physical presence but recording high sales in their jurisdictions, is expected to impact companies that rely on the digital medium to drive their profits.
The agreement, in other words, notes that the firms would not only pay taxes to the nations where they are physically based, but also to the countries from where they are making profit through an online presence.
However, a part of the agreement that states that countries would have to revoke their respective digital services taxes after the imposition of a common global corporate tax, would end up benefitting the Silicon Valley companies.
Countries such as France have imposed digital services taxes and would remove them in favour of the global agreement. The US considers those unilateral digital taxes to be unfair trade measures that single out the American tech companies such as Google, Amazon and Facebook.
How have the digital behemoths responded to the G7 proposal?
Although it is being considered that companies like Google, Facebook and Amazon would have to pay a higher share of taxes if the proposal is implemented, most of the digital behemoths have welcomed the G7 agreement.
"We strongly support the work being done to update international tax rules. We hope countries continue to work together to ensure a balanced and durable agreement will be finalised soon,” Google spokesman José Castañeda said in a statement emailed to Reuters.
Facebook, which has also welcomed the G7 agreement, asked the international community to take cognisance of the fact that it is supporting the proposal even though it would have to pay more taxes.
"We want the international tax reform process to succeed and recognise this could mean Facebook paying more tax, and in different places," Nick Clegg, vice president of global affairs at Facebook, said.
"We believe an OECD-led process that creates a multilateral solution will help bring stability to the international tax system. The agreement by the G7 marks a welcome step forward in the effort to achieve this goal," a spokesperson of Amazon was quoted as saying.
When could the common tax agreement come into effect?
The proposal, agreed and jointly formulated by the G7 group, would be tabled before the Group of 20 (G20) states that are expected to convene in July for a meeting. Since the latter group includes a number of developing nations, there could be some apprehensions being raised against the proposed agreement.
According to campaign group Oxfam, the agreement prepared by G7 would itself require further deliberations to achieve its intended goals.
"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," Oxfam said.
"Stopping the explosion in inequality caused by COVID-19 and tackling the climate crisis will be impossible if corporations continue to pay virtually no tax .... This is not a fair deal," it further said, adding that "the G7 can't expect the majority of the world's countries to accept crumbs from its table."
With Reuters and AP inputs.