Multinationals face ‘Ctr-Alt-Del’ on tax

In early June, ahead of the Group of Seven (G7) leaders’ meeting, the finance ministers reached a breakthrough agreement on corporate tax in the digital age, undertaking “to address the tax challenges arising from globalisation and the digitisation of the economy and to adopt a global minimum tax”.

The G7 aim to reduce the ability of multinationals to use legal and accounting techniques to lower tax bills by shuffling profits and expenses out of countries.

Two years ago more than 100 countries, working through the Organisation for Economic Co-operation and Development (OECD), agreed on a road map for this reform. The G7 announcement is the next step. The first pillar of the plan aims to tax companies in the countries where they are actually doing business and generating revenue. The main focus is large internet companies.

The G7 finance ministers have now agreed to support replacement of digital levies with “taxing rights” for countries to apply to “the largest and most profitable” multinationals selling products and services within their borders.

The second pillar proposes a minimum global corporate tax rate of 15%. That’s lower than in every G7 country, so this is not about raising business tax rates domestically. Instead, it aims to smoke out the use of tax havens.

In 2019, OECD research suggested corporate taxes of as much as $240bn a year could be recovered, and the IMF put it at $600bn.

While the G7 has now endorsed a way forward, validating years of work, a lot remains to be done. Attention turns to a G20 finance ministers meeting in Venice in July, where debate will be difficult. And although US treasury secretary Janet Yellen has been key in pushing things forward, winning approval in the US congress is far from certain. As for the EU, while its biggest member states are on board, low-tax Ireland is not. /Toronto, June 15