On Saturday 5th June 2021, the Group of Seven (G-7) finance ministers backed a US proposal that called for corporations around the globe to pay a minimum of 15% tax on earnings.
This follows US President Joe Biden’s initial proposal to establish a global minimum tax rate of 21%, which is the current rate of corporation tax in the US.
What Does a 15% Global Minimum Tax Rate Mean?
The global minimum tax rate is designed to put an end to the low rates of tax paid by digital giants and large conglomerates such as Google, Facebook, Apple, Nike and Starbucks, which have been using of complicated webs of companies to shift their profits out of markets like the UK, where they earn most of their revenues, into low-tax areas, or tax havens, such as Ireland and the Caribbean. This is estimated to have cost exchequers around the world losses of £311bn annually as a result of profit-shifting.
The reform is expected to capture around 8,000 multinational companies and according to analysis by the EU Tax Observatory, oil giant companies including BP, Shell, Iberdrola and Repson as well as banks such as HSBC, Barclays and Santander.
UK Finance Minister Rishi Sunak said:
“G-7 finance ministers today, after years of discussions, have reached a historic agreement to reform the global tax system, to make it fit for the global digital age- and crucially to make sure that it’s fair so that the right companies pay the right tax in the right places.”
Whilst there is currently a general agreement between the western economic leaders, a number of other leading countries such as China, India, Brazil and Russia, are due to join the conversation in July.
The G-7 also agreed that countries where multinational companies generate revenue will be awarded new taxing rights on a minimum of 20% of profit exceeding a 10% margin for the largest and most profitable firms. It is expected that around 100 multinationals will be within the scope of this agreement, though rather surprisingly, Amazon is not expected to be caught by this part of the reform. Whilst it may come as a disappointment to many, this is because Amazon’s profit margin was only 6.3% in 2020. However, according to US Treasury secretary, Janet Yellen, they will be captured under the global minimum rate.
Through both parts of the reform, OECD estimated that up to £57bn could be raised in additional tax revenues each year, though the Tax Justice Network advocacy group believe a 21% minimum tax would raise £461bn in unpaid tax annually, allowing the UK to reap an extra £14.7bn.
However, not all countries are expected to benefit from the higher global tax minimum. The agreement was also designed to put a stop to countries that lure businesses by offering lower tax rates, such as Ireland. According to its finance minister, Paschal Donohoe, Ireland could potentially lose up to £1.7bn each year. The country currently levies corporation tax at 12.5% and raised €11.8bn (£11.1bn) in corporate tax last year.
Donohoe said he believes smaller nations should be allowed lower tax rates as they don’t have the same capacity for scale as larger economies like the US and UK, however, with backing from the G-7, the rules will likely be difficult to avoid as low-tax member states can’t afford to isolate themselves from the world’s largest economic powers.
Pascal Saint-Amans, head of tax administration at the OECD, said:
“What the US has put on the table, we want the rest of the world to follow, we kill tax havens. The game is over. Let’s move to a minimum agreed level. Countries want a solution. They want to get out of controversies and want to move on.”
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