G7 agreement on a global minimum corporate tax

The G7 finance ministers of the most economically advanced countries met in London last weekend. They agreed to resolve the thorny issues on the taxation of big multinational firms that has bothered tax authorities of many nations for decades.

The agreement could finally create a stable set of rules that govern the taxation of big corporations with multinational reach so that all tax stakeholders get a fair share of the benefit that flow from their economic operations.

A minimum global tax rate of 15 percent on big, multinational corporations.The solution they arrived at is to devise a tax system that is built on two pillars of taxation.

The first pillar is that tax authorities are given the right to tax a share of profits that are earned by the multinational corporation regardless of the location of their headquarters. Examples: this could be the country’s share in the market share for a particular digital services (Amazon, Google, Facebook) or shoes (Nike, Adidas).

Under the first pillar, global companies with at least a 10 percent profit margin are subject to tax. Twenty percent of any profit above that would be reallocated and taxed in the countries where they operate, according to the G7 communiqué.

The second pillar of taxation is the adoption of a minimum corporation tax rate that is imposed on the overseas profits of large companies headquartered in another jurisdiction. Under this principle, a minimum corporation tax rate of 15 percent would be imposed by countries on the overseas profits of large companies headquartered in their jurisdiction. The tax would be paid to the country where the parent company of the multinational is based.

Historic and transformational? The press commentary after the meeting was as enthusiastic as the words of each of the ministers when they appeared before the cameras or faced the questioning members of the media. Such adjectives as “transformative,” “groundbreaking,” and “historic” were used to describe what had just been concluded, even though each minister spoke with a particular home crowd and interest in mind.

During the negotiations, the US was able to secure an understanding that earlier digital services taxes, which the EU countries and UK, have levied would be replaced by new taxes that conform with the agreement. The US has complained that such taxes unfairly targeted American technology companies.

The G7 is a grouping of seven countries that includes Canada, France, Germany, Italy, Japan, the United Kingdom, and the US. Together, they represent the bloc of industrial powers of older standing.

Especially since the financial crisis of 2008, the OECD (Organization for Economic Cooperation and Development), based in Paris, has been playing a role in getting 135 countries negotiate the future global tax system. The agreement just launched under the G7 will likely be taken up in the G20 when it meets in Italy next month.

Judging from the reaction of big tech global corporations, the current deal is something that that they are happy to support. The alternative for them is a world in which many jurisdictions could impose much higher taxes that are not built on the pillars on which the rules are built. In fact, special digital services taxes that have recently been imposed on them in the European Union and the UK could expose them to higher tax liabilities.

The big tech giants, reacting to the G7 developments, are one in supporting the G7 agreement. Their immediate reactions are noted below.

From Facebook: “We welcome the important progress made at the G7. We want the international tax reform process to succeed and recognize this could mean Faceboook paying more tax and in different places.”

From Google: [Our company hopes] “countries continue to work together to ensure a balanced and durable agreement will be finalized soon.”

From Amazon: “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.”

The next stage in this negotiations is the ministers of the G20 countries. They meet in July, next month in Italy. The G20 countries (aside from including all the G7 countries) include some of the biggest second-tier economies –the big countries China, India, Brazil, Mexico, Indonesia, Turkey, South Africa, South Korea and Saudi Arabia.

If the wider group of nations accept the principles developed in the G7 agreement, then indeed, the outcome for the global tax system would be significant. Otherwise, the gains would be localized among the big industrial economies whose tax authorities will be able to redistribute specific tax benefits mainly among themselves. That itself could serve a big purpose, but it will not be a major transformation of the global tax system.

If the two pillars of taxation help to produce MNCs (multinational corporations) that compose a sizeable and broad list of the big corporations, then that might produce a larger taxable base for the global economy from which to generate taxes.

Tax experts working on the global tax reform know how sensitive the outcome is on the basis of the two pillars of taxation on which this agreement among the finance ministers are founded. A significant change in the number of MNCs in the list of taxable corporations can be altered by the specific thresholds on the amount of taxable profits under pillar one and by the minimum tax level agreed upon, which, in this case, is 15 percent. If the latter were one percent higher, the gains in taxable collections of the tax authorities rise.

Impact on the Philippines. Although this development on global tax negotiations are important for many economies, it will take some time before we can feel the influence of these negotiations on us.

For one thing, the Philippines has been in general a high tax jurisdiction until recently. Moreover, only recently our tax and investment system has been the subject of major reforms. For a long while, these changes will command our attention mostly.

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