The G7 group of the world’s richest countries have reached “a historic agreement” on taxing large tech and multinational companies.
Meeting in London on Friday and Saturday ahead of the G7 leaders meeting next weekend, the finance ministers agreed to a global minimum tax of at least 15% which will be applied on a country by country basis.
“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,” the British government's Chancellor of the Exchequer (Finance Minister) Rishi Sunak announced on Saturday morning.
The Group of Seven (G7) is an informal club of wealthy democracies consisting of Canada, France, Germany, Italy, Japan, the United States and the United Kingdom.
Mr Sunak said, “Under the principles of the landmark reforms, the largest global firms with profit margins of at least 10% will be in scope – with 20% of any profit above the 10% margin reallocated and then subjected to tax in the countries where they make sales.”
The G7 also agreed to the principle of a global minimum corporation tax on large firms of at least 15% operated on a country-by-country basis, which Mr Sunak said would create “ a more level playing field for UK firms and cracking down on tax avoidance.”
The tax agreement pushed by the Biden administration is intended to target companies, particularly large digital firms, which base their operations in low tax jurisdictions to benefit from more advantageous tax thresholds compared to their home countries.
Supporters of the move argue that a minimum tax is needed to reduce the competition between countries over offering multinationals the lowest rate in what some refer to as a "race to the bottom".
The move for a common global corporate tax rate is also being linked to the economic impact of the COVID-19 pandemic.
Governments that rely heavily on corporate taxes are now intensifying the pressure on their native companies which have headquartered their business in offshore financial centres and low tax jurisdictions such as the Cayman Islands and Ireland.
The Irish government has expressed "significant reservations" about the move. Ireland's low tax rate of 12.5 per cent has attracted tech giants such as Google, Facebook and others to base their European operations there.
It is estimated that the imposition of the global corporate tax could cost Ireland and similar low tax jurisdictions billions in lost revenue if the tax rate agreed by the G7 Finance Ministers entices the targeted companies to revert their headquarters to their respective nations.
Corporate tax has been on the radar of the G7 countries for quite some time in a push for global fiscal reform focused on taxing the profits of their multinational companies which have based operations offshore for tax purposes.
The agreement, which will have to be ratified by the respective leaders, "meant the right companies pay the right tax in the right places", according to UK Chancellor Sunak.
It will now be discussed in further detail at the G20 Financial Ministers & Central Bank Governors meeting in July.