(CN) — In a big step toward closing loopholes that allow multinational corporations such as Google and Amazon to avoid paying taxes through tax havens and subsidiaries, finance ministers for the Group of Seven proposed over the weekend a global minimum corporate tax rate of at least 15% and a formula for levying taxes on profits where they are made.

The deal, struck during a G-7 finance meeting in London and pushed by U.S. Treasury Secretary Janet Yellen, is part of a broader effort by debt-saddled and crisis-struck governments around the world to find new revenues and fix out-of-date international tax rules that were laid down a century ago.

Though lower than the 21% rate sought by some, the 15% minimum tax rate has been hailed as a historic breakthrough for international tax law and received pledges of support Saturday from the G-7 nations. The finance ministers also endorsed making the world’s biggest companies pay taxes in countries where they do lots of sales but have no physical headquarters.

Governments and policymakers have labored for roughly the past decade over how to tax stateless multinationals capable of making huge profits through online sales, digital data collection and online advertising while also shifting their profits to subsidiaries in tax havens by exploiting mostly legal, but unfair, methods. Nations competing to offer the best tax deals in turn have been locked in something of a race to the bottom.

Rishi Sunak, the British Treasury chief who chaired the meeting, said the G-7 tax deal creates “a fairer tax system fit for the 21st century.”

This is not nearly the end of the road. The proposals will need to be approved by the G-7’s individual states and gain global acceptance too. The Group of Seven is made up of the United States, the United Kingdom, France, Germany, Italy, Canada, Japan and the European Union.

In Washington, Republicans could seek to derail the proposals, arguing they are bad for business; and some states in the EU that profit as tax havens, such as Ireland and Cyprus, may try to do the same.

The proposals will be taken up by the finance ministers of the G-20 — another informal group that includes the G-7 states as well as other major economies such as China, Russia, India and Saudi Arabia — at a meeting in Venice in July.

Italy is hosting the G-20 this year with a final summit slated for October in Rome. The U.K. is the host of the G-7 and U.S. President Joe Biden, who’s pushing for an increase in corporate taxes in the U.S. to pay for his massive stimulus spending plans, is scheduled to make his first trip to Europe as president when the G-7 meets for three days on the English coast starting Friday.

Simultaneously, the Paris-based Organization for Economic Cooperation and Development, which includes more than 100 nations, has been working on similar global tax proposals for several years.

On Sunday, OECD Secretary-General Mathias Cormann said in a statement that the G-7 proposal was a “landmark step toward the global consensus necessary to reform the international tax system.”

“The combined effect of the globalization and the digitalization of our economies has caused distortions and inequities which can only be effectively addressed through a multilaterally agreed solution,” Cormann said.

The aim is to close tax loopholes that allow multinationals to set up schemes in tax havens such as Ireland, the Cayman Islands, Bermuda and Cyprus, and avoid paying taxes even as they make immense profits around the world. These tax schemes often rely on exploiting gaps and mismatches between national tax rules.

Tax experts say today’s international tax regime was laid down in the 1920s and exempt businesses from paying taxes on overseas sales if they don’t have a physical presence, such as a factory or store, in the country where those sales take place. With the digital economy growing exponentially, many policymakers say global tax reform is fundamental.

Saturday’s G-7 deal can also be seen as an effort by the U.S. to stave off a raft of so-called digital services taxes being proposed, and implemented, by EU and non-EU countries that seek to take a bit of the tax-free profits American tech giants like Google, Amazon, Facebook and Airbnb are making in their countries.

Since the 2008 financial meltdown forced governments and citizens to painfully tighten their belts, much more scrutiny has been paid to the creative ways multinationals avoid paying taxes on their global sales and public outrage has grown in tandem.

With trillions of dollars being spent in aid and economic stimulus amid the coronavirus pandemic, political leaders say finding new revenues is even more important.

The G-7 agreement was based on two pillars, the most significant of which is agreement on the principle that at least 15% global minimum corporation tax should be levied on a country by country basis. Thus, for example, if a German multinational declared its income in Ireland, where it is taxed at an effective rate of 5%, Germany would be allowed to levy an extra 10% to arrive at a rate of 15%.

Also, the agreement says the largest and most profitable multinationals should be required to pay tax in the countries where they operate and not just where they have their headquarters.

Specifically, the new rules would apply to global firms with at least a 10% profit margin and see 20% of any profit above the 10% margin reallocated and then subjected to tax in the countries they operate.

Some big U.S. tech companies have said for now that they agree with the proposals. There seems to be growing awareness in some big tech boardrooms they must pay more in taxes.

“We want the international tax reform process to succeed and recognize this could mean Facebook paying more tax, and in different places,” Nick Clegg, Facebook’s vice-president for global affairs, posted on Twitter.

Gabriel Zucman, a tax expert the University of California-Berkeley, said agreeing on a 15% minimum rate could go a long way to dealing with tax dodging.

“This is a game changer because it slashes incentives for multinational firms to book profits in tax havens,” he said in an analysis on Twitter. “In effect, this severely undermines (and ultimately destroys) the development model of tax havens.”

One recent study found that globally about $500 billion in tax revenues are lost each year from corporate tax dodging, according to the EU Tax Observatory, an independent research laboratory hosted at the Paris School of Economics. The study found that middle- and lower-income countries suffer proportionately much more from tax dodging because the revenue they lose amounts to a higher percentage of their GDP.

The EU stands to gain about $58 billion in new tax revenues under a 15% minimum rate, according to a study by the EU Tax Observatory.

But the proposal was criticized too because many see a 15% rate as far too low.

“It’s absurd for the G-7 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,” said Oxfam, an international charity. “They are setting the bar so low that companies can just step over it.”

Biden initially proposed setting the minimum rate at 21% but that got watered down to 15% at the G-7 meeting.


Courthouse News reporter Cain Burdeau is based in the European Union.

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