One of the biggest issues with our economy is keeping businesses within the United States. Obviously, corporate tax dollars are important to the US economy. There has been a long and contentious battle between nations, some offering low to zero taxes to lure businesses.
Well, earlier this month there was a major agreement in principle between a group called the G7. This agreement would set a global corporate tax of 15% on all earnings for all nations. The group also said that the biggest companies should pay taxes where they generate sales not just where they have their physical presence. If this is finalized this would represent a significant development in global taxation.
After the G7 summit, U.K. Finance Minister Rishi Sunak announced in a video on Saturday. As seen on CNBC “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 make sure that its fair so that the right companies pay the right tax in the right places.”
In this article today, I will start by explaining what the G7 is and why the agreement between this small number of countries is so significant in further negotiations at summits with the rest of the countries that will participate. I will explain some points of benefit this will have for not only our economy but also the effects that it can have on other countries across the world trying to rebuild their economies since the coronavirus pandemic. From there I will expand on the process and a long road ahead to getting the rest of the world in on this agreement.
What is the G7?
G7 is short for Group of 7. This is an informal club of wealthy democracies consisting of Canada, France, Italy, Germany, Japan, the United Kingdom, and the United States. The heads of these governments as well as representatives of the European Union meet annually at the G7 summit. As of 2018, the G7 represents 58% of the global net wealth ($317 trillion), more than 46% of the global gross domestic product based on nominal values, and more than 32% of the global GDP based on purchasing power.
This group was started informally during the 1973 oil crisis when US secretary of Treasury George Shultz convened a gathering of finance ministers from West Germany, France, and the United Kingdom. They met in the Library of the White House and because of this was called The Library Group. Later that year Japan was added to the Group and was named the Group of Five. Since then, the European Union and Canada have been added to the group.
Though seven is a small amount of all the countries in the world as you can see these countries hold a large majority of the world’s wealth and gross domestic product so an agreement between this group is huge towards a change in global taxation. An agreement between these top economies will accelerate negotiations among roughly 140 countries that are being led by the Organization of Economic Cooperation and Development (OECD).
How does this get approved?
The next step on the road of making this reality will be at the G20 Summit this is a larger group of finance ministers that meet. The G20 Summit will take place in Rome in October. After this, it will move to the much larger group of about 140 at the OECD. This meeting is set to take place in Paris.
As these groups move further in negotiations there are expectations that they would like to see something a little closer to 25% to be the minimum tax amount. President Joe Biden and his administration had initially suggested a minimum tax of 21% but after tough negotiations, a compromise of 15% was reached. As negotiations move forward the issue may be contended by a lot of the smaller countries especially the ones within the European Union.
A lot of these countries are the ones that utilize lower tax rates to attract big-name firms. A good example of this is Ireland. Their tax rate is 12.5 % and they are already arguing that smaller nations should be allowed to have lower tax rates given that they do not have the same capacity for scale as the large economies do. You will not need all countries to agree but you will need most countries to be willing to move at the same time. Countries that were not at the table for the G7 will probably either try to revise this proposal or have new proposals of their own.
Unilaterally as much as Treasury Secretary Janet Yellen worked hard with the other members at G7 to come to an agreement in principle she will also face an uphill battle getting this approved especially with resistance from Republicans already mounting. President Trump had opposed digital tax initiatives in different countries and had even threatened that tariffs would be imposed against countries that tried to tax US tech companies.
If she along with the Biden administration can not push the tax legislation through Congress, the agreements reached this weekend will be for naught. Yellen was quoted as reported by the New York Times: “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 also added that the tax would level the playing field for businesses and encouraging countries to compete on a positive basis, such as educating and training our workforces and investing in research and development and infrastructure.
Effects on Corporations
With changes in corporate taxation globally, the biggest entities that will be affected will be the large tech firms. Governments worldwide have constantly complained that these companies should be paying them more taxes because they do business within their country. Some countries have passed taxes targeting the revenue of these companies.
The agreement would enable countries to tax some of the profits made by big companies based on the revenue they generate in that country rather than where the firm is located. This would also take away the incentive for these large companies to shift profits to low-tax offshore havens. These changes should bring hundreds of billions of dollars into governments much in need of funds due to the covid-19 pandemic.
The biggest three of these companies, Google, Amazon, and Facebook seem very encouraged and seem to be backing these moves towards a global tax rate. Nick Clegg, Facebook’s vice president for global affairs was quoted saying that his company had “long called for reform of the global tax rules and we welcome the important progress made at the G7. We want the international tax reform process to succeed and recognize this could mean Facebook paying more taxes and in different places.”
Google spokesperson Jose Castaneda said in a statement that they strongly support the work done so far and that they strongly hope countries continue to work together to ensure a balanced and durable agreement will be finalized soon. A spokesperson from Amazon 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. We hope to see discussions continue to advance with the broader G20 and the Inclusive Framework alliance.”
In conclusion, there is still a long road ahead. Getting enough countries to agree on this and then implementing the changes and setting regulations could take years. These companies that will be affected are immensely powerful and the powerful always want to pay less in taxes. This first step and coming to terms with the G7 is a step in the right direction but it hardly means that this will come to fruition.
Also, as much as this will help create a level playing field for taxing these companies but it will not stop the common practice of tax avoidance by these companies.
The legal and technical complexity of these multinational companies will make it quite different to regulate and determine where revenues of these companies were generated. At least setting a minimum 15% tax will take away the incentive to not show revenue within the country it was generated.