World's richest nations have finally succeeded in reaching a consensus on bringing big multinational corporations under the tax net. In fact, the global corporations had long been engaged in tax avoidance through shifting their profits to tax havens. Amid the Organisation for Economic Cooperation and Development (OECD)'s decade-long effort to negotiate a corporate tax deal, Donald Trump's America threw a spanner in the works, as Trump would not allow, especially, the US tech giants to be taxed. Worse yet, he started a kind of trade war with US's allies in Europe through adopting countermeasures like retaliatory import taxes on products from those countries, if they (national governments of Europe) levied any tax on the US corporates operating there. The multinational companies took full advantage of this situation leading to a global tax-anarchy under the leadership of erstwhile US president Trump. However, the situation has undergone a qualitative change after Joe Biden got elected as the US president in November last year. President Biden in line with his party policy and election pledge was not one to pamper the global corporates. The American multinational giants had long been evading US federal tax. And now that the global economy, let alone the US economy, has been facing the worst crisis in history, thanks to the raging Covid-19 pandemic, the governments need money to pay off the government debt incurred through expenses made to fight the pandemic and feed the jobless people from the public exchequer. The global corporates, especially the tech giants, who are making super-profits during such difficult times cannot just get a free ride. So, the US president had a plan to raise US$2.5tn through corporate taxes to pay off the debts the US government has run up through generous spending from the stimulus package. Also, President Biden needs money to meet the expenses for his planned infrastructure renewal programme. As such, he proposed that the big corporates will have to pay a minimum global tax of 21 per cent. In that case, the big American corporate houses including tech giants, namely, the so-called 'Silicon Six-Microsoft, Amazon, Facebook, Alphabet (the company that owns Google), Apple and Netflix-could be made to pay the minimum global tax in the countries where they sell their products. Such arrangements would thus discourage these companies to avoid paying federal taxes at home. The measure would also demotivate such countries as are out to undercut any corporate tax that competing national governments might impose on global corporates by levying the latter at a far lower rate. For example, Ireland charges 12.5 per cent corporate tax as a divisive tactics.
However, the G7 finance ministers on June 5 reached, what they termed, a 'historic agreement' to tax multinational companies. Especially, the new arrangement, the so-called 'first pillar', will make tech giants pay a higher amount of tax than what they are paying now where they operate. And this would apply to global corporates with at least 10 per cent profit margin, while the 'second pillar' is about the commitment of the countries in the deal to stick to the minimum corporate tax floor of 15 per cent. This commitment aims to discourage the states (such as in the case of Ireland) to undercut one another.
However, the minimum corporate tax they have decided upon is 15 per cent which is much lower than what the US president proposed earlier. Even so, it is undoubtedly a step forward towards reforming the global tax system and thereby bringing the multinational companies under a universal tax discipline. The new tax regime will ensure that big multinationals may not declare their profits in low tax countries by way of establishing branches there. Another positive side of the London agreement of the Group of 7 is that it will now be possible to tackle the problem of dealing with the trade in the 'intangibles' such as information and data.
This is undoubtedly a befitting step to reform the century-old rules to meet the needs of the 21st century global economy. The G7's decision to create a floor for a universal corporate tax, it is hoped, would pave the way for a broader accord at the upcoming Venice summit of the heads of state and government of the Group of 20.
Despite the G7 agreement on common corporate tax regime, the challenge of implementing the deal will remain. For example, there is a view within the US diplomatic circle that the American tech companies are being unfairly taxed by some European countries such as UK and EU nations. At the moment, the UK, for example, levies corporate tax at the rate of 19 per cent and has a plan to raise it to 25 per cent by 2023.
Unsurprisingly, a concerned US Treasury Secretary, Janet L. Yellen, expressed her hope that the national governments would soon replace their existing corporate tax regime with the new tax deal reached at June 5 G7 meet in London.
The Irish finance minister, on the other hand, welcomed the new tax deal but made it clear that his country will continue to push for what he termed a legitimate tax competition.
So, the minimum corporate tax agreement reached at the G7 meeting is just the beginning. The details of the agreement are to be worked out in a series of meetings at different levels in the future. And the challenge will be to ensure that the global corporates go by the rules and the national governments stick to their commitments.