Global minimum corporation tax rate

G7 agreement on global minimum corporation tax rate

Historic G7 agreement on global minimum corporation tax rate 

Historic deal’ hailed

The Group of Seven wealthy nations moved towards supporting US-backed plans for a minimum global level of corporate tax rate of 15% aimed at getting multinationals – especially tech giants – to pay more into government coffers hit hard by the pandemic. The meeting is hosted by the UK’s Chancellor of the Exchequer Rishi Sunak.

The news comes as official data showed Ireland’s economy grew almost 8% in the first quarter of 2021, during a harsh lockdown when most shops closed, as multinational firms’ revenues helped it continue to buck pandemic downturn trends.

Ireland, which has a maximum corporate tax rate of 12.5% that helped it attract a large number of US tech companies, stands much to lose.

Ireland’s Department of Finance said last week that Ireland has “significant reservations” over Biden’s plans and wants to keep its 12.5% tax rate.

The report outlines that an Irish subsidiary of Microsoft made a profit of $315 billion last year but paid no corporation tax as it is “resident” for tax purposes in Bermuda. 

Another report outlines that the profit generated by Microsoft Round Island One is equal to nearly three-quarters of Ireland’s GDP. 

In a statement, a Microsoft spokesperson said the figure relates to: “a one-time event and reflects an inter-company reorganization, not a cash gain.”

Ahead of today’s meeting, Sunak said that he hoped this year there would be a “global agreement on digital taxation”.

“We want companies to pay the right amount of tax in the right place, and I hope we can reach a fair deal with our partners,” he said. 

A deal on a minimum corporate tax rate is “within sight”, finance ministers from France, Germany, Italy and non-G7 member Spain declared today.

“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,” US Treasury Secretary Janet Yellen said.

French Finance Minister Bruno Le Maire said for the first time G7 members can define tax rules that fit the 21st century international system. “We’ve been fighting for four years in all European and international forums, here at the G7 and the G20 for a fair taxation of digital giants and for a minimum corporate tax.”

What is the global minimum corporate tax?

US President Biden has called for a unified minimum corporate tax rate of 15% in negotiations with the Organisation for Economic Co-operation and Development (OECD).

The minimum tax level is part of a reform of corporate taxation that seeks to reallocate taxing rights between countries, not only based on tax residency but also depending on where a company has many customers and conducts business.

The minimum tax, on the other hand, is aimed squarely at low-tax jurisdictions – including Cayman, Bermuda and the British Virgin Islands – and the ability of multinationals to shift profits to subsidiaries in locations where they are subject to little or no tax.

It would enable the home countries of multinationals to tax any amount that is left untaxed in other locations up to 15%.

The reform targets predominantly, but not exclusively, tech companies that can deliver services without having much of a physical presence in their consumer markets and thereby escape taxes on their profits there.

German Finance Minister Olaf Scholz said, “This is very good news for tax fairness and solidarity and bad news for the tax havens of the world.”

G7 looking out for their own

Although details of the agreement are still sparse, the G7 committed to awarding market countries taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational companies.

“We also commit to a global minimum tax of at least 15% on a country by country basis,” the group said in a communique, adding that both parts of the tax reform should be negotiated at the same time.

The 15% rate is significantly watered down from the US administration’s initial demand of 21% to enable a much-wider adoption.

It is enough to hit countries that are not typically considered offshore, like Ireland, Hong Kong or Luxembourg.

However, the final deal is not done yet. G7 countries will now take the deal to the Group of 20 meeting in Venice, Italy, next month where they hope to extend the agreement to the G20 members.

Talks also continue among the 139 member countries and jurisdictions of the OECD/G20 Inclusive Framework on BEPS to reach a final deal so that “multinational companies pay their fair share everywhere”, Cormann said.