Can the G7 decision on a global minimum corporate tax rate be a first step in rethinking the way our taxation systems work?
The recent G7 meeting saw an unprecedented step forward in rethinking the global economy after two difficult decades. The change of administration in the US was vital in breaking the deadlock, opening prospects for a new era in multilateral cooperation.
Finance ministers of the Group of Seven (G7) reached a landmark agreement on a global minimum corporate tax rate on Saturday, June 5th, 2021. The meeting’s results could form the basis of a worldwide deal on taxation.
As stated in the official press release, the agreement will be functional to establishing a global minimum corporate tax rate of “at least 15%”. Thus, it finally looks like major economies are planning to end what has recently been called by US Treasury Secretary Janet Yellen a “30-year race to the bottom on corporate tax rates”. In the last decades, many countries competed to lure profit shifting from multinational firms in their tax jurisdiction by offering lower corporate tax rates.
The right to tax is the essence of sovereign power. That is why coordinated international action on the topic is so tricky. The proposal agreed on Saturday would only apply to overseas profits, allowing governments to top-up taxes paid overseas if the companies enjoy a lower regime than the minimum rate agreed. This setup aims to wipe out the advantage of tax shifting for big multinationals while leaving the countries free to enforce the tax regime they prefer in their territories.
Our institutional partner, the Organization for Economic Cooperation and Development (OECD), has been working with its member countries for years to establish a global corporate minimum tax. It finally seems that the current crises have convinced wealthy countries to speed up the process, thus increasing the resources available to improve welfare and repay the debts sustained during the pandemic.
Although the importance of this step should not be underestimated, there are still many negotiations underway, including those on the metrics that will determine the companies to whom these rules will be applied. Still, this agreement establishes the critical principle that multinationals should be compelled to pay taxes in the countries where they do business rather than wherever they end up declaring their profits and demonstrates that new thinking on taxation is both necessary and possible.
Already prior to the COVID-19 pandemic, a reflection on the modern fiscal systems started flourishing from multiple academic and policy circles around the world. This reflection has become more urgent during the current health crisis, which pushed the economy further towards much more capital and technology-centred models, which are less dependent on the workforce’s contribution. In fact, most fiscal systems in Europe were created before the first world war, when the economy looked very different, and national governments had the sovereignty to define and impose their perspectives.
Many of the problems we face today can be ascribed to the fact that most rules of the international economy were conceived at a time when the movement across borders of goods, capital and activities was difficult and expensive. In recent decades, globalization has pushed many governments into a race to the bottom on taxation that aims to attract business and investment, despite any possible consequence on the global economy’s health or long-term sustainability.
It is clear that those rules were designed at a very different time and are not adapted to answer the economic challenges of the modern context, and Re-Imagine Europa welcomes these global efforts to rethink how our economies work.