TAX HAVENS

G7 finance ministers agree on 15% minimum tax to crack down on corporate tax dodging

The deal has been praised as a historic step in ending the ‘race-to-the-bottom’ between tax havens, but will need international backing to move forward.

A group of the world’s most economically advanced nations have agreed on landmark new reforms to crack down on cross-border tax avoidance that would force multinational corporations like Google and Apple to pay taxes in the countries where they operate, rather than in tax havens where they choose to shift their profits.

The deal between the United States, United Kingdom, Canada, France, Germany, Italy and Japan was made on Saturday as part of a meeting of the Group of Seven finance ministers in London, and included provisions to introduce a minimum global corporate tax rate of 15%.

U.K. Chancellor Rishi Sunak hailed the “seismic” agreement as a “huge prize” for taxpayers, and said it would lead to a fairer tax system.

“This is a truly historic agreement and I’m proud the G7 has shown collective leadership at this crucial time in our global economic recovery,” Sunak said in a statement.

The two-part plan aims to first make companies pay taxes in countries where they are selling products and services, rather than where their declared headquarters or subsidiaries are based.

The second part of the plan would institute a minimum 15% tax rate on a country-by-country basis, effectively putting an end to tax havens that use a lower corporate tax to lure large multinational companies looking to slash tax bills.

Investigations by the International Consortium of Investigative Journalists including the 2017 Paradise Papers and 2014 Lux Leaks, revealed industrial-scale tax dodging, exposing ways in which companies use complex structures, secret deals and loopholes in jurisdictions with low rates for tax optimization schemes.

Global tax reform efforts have continued with heightened urgency this year as governments contend with rising deficits and economic challenges from the coronavirus crisis. In recent weeks, Europe Union member countries agreed to new tax transparency rules for multinational companies, and the European Commission advanced a proposal to unify corporate tax rules across the bloc.

The U.S. under its new administration has been a leader in calling for a global minimum tax rate, and Treasury Secretary Janet Yellen, the country’s representative at the G7 meeting, hailed the announcement as a way of “leveling the playing field for businesses.”

“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 U.S. and around the world,” she said in a statement.

German Finance Minister Olaf Scholz said the deal was “bad news for tax havens.” French Finance Minister Bruno Le Maire acknowledged the deal was “a starting point” and indicated that France would push for the highest minimum tax rate possible.

Already potential loopholes are being highlighted by onlookers. Tax expert Richard Murphy from Sheffield University in the U.K. said that the G7 announcement, which took aim only at companies with a profit margin of 10% or more, would effectively exclude a company like Amazon, that operates at a lower profit margin.

“This could turn out to be a false hope unless they get the detail right,” he told the Guardian, and said approaches to reporting profits in each country could be “easily gamed.”

The reforms will next need to be discussed by the G20 next month, before being subject to wider negotiations with the rest of the countries in the Organization for Economic Cooperation and Development, where nations will likely haggle over definitions of which companies should be covered by the tax reforms and final agreement over the minimum tax rate.

Countries with lower tax rates, including Ireland, Hungary, Malta and Cyprus, could offer up resistance as details are negotiated. Irish Finance Minister Paschal Donohoe has already indicated his country will be defending its current 12.5% tax rate.

The G7 finance ministers also agreed to strengthen central beneficial ownership registries, particularly with a focus on clamping down on environmental crime. The group also pledged to make it mandatory for companies to report on the impact of their activities on the environment and climate, and on risks associated with climate change.

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