Business

G-7 back steps to deter tax dodging by multinational firms

From left, EU's Economy Commissioner Paolo Gentiloni, Eurogroup President Paschal Donohoe, World Bank President David Malpass, Italy's Finance Minister Daniele Franco, French Finance Minister Bruno Le Maire, Canada's Finance Minister Chrystia Freeland, Britain's Chancellor of the Exchequer Chancellor Rishi Sunak, Managing Director of the IMF Kristalina Georgieva, Germany's Finance Minister Olaf Scholz, U.S. Treasury Secretary Janet Yellen, Secretary-General of the Organisation for Economic Co-operation and Development (OECD) Mathias Cormann, Japan's Finance Minister Taro Aso pose for a family photo as finance ministers from across the G7 nations meet at Lancaster House in London, Saturday, June 5, 2021 ahead of the G7 leaders' summit. (Henry Nicholls/Pool Photo via AP)

LONDON (AP) — The Group of Seven wealthy democracies agreed Saturday to support a global minimum corporate tax of at least 15% in order to deter multinational companies from avoiding taxes by stashing profits in low-rate countries.

G-7 finance ministers meeting in London also endorsed proposals to make the world’s biggest companies – including U.S.-based tech giants – pay taxes in countries where they have lots of sales but no physical headquarters.

The agreement followed the outlines of proposals by U.S. President Joe Biden, who has pushed for a global deal on corporate taxation in return for countries such as France withdrawing local taxes that the U.S. argues unfairly target American tech companies.

British Treasury chief Rishi Sunak, the meeting’s host, said the deal would “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.”

U.S. Treasury Secretary Janet Yellen, who attended the London meeting, said the agreement “provides tremendous momentum” for reaching a global deal that “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.”

The meeting “emphasized the power of global cooperation in addressing the most critical issues we face,” Yellen said.

The meeting of finance ministers came ahead of an annual summit of G-7 leaders scheduled for June 11-13 in Cornwall, England. The endorsement from the G-7 could help build momentum for a deal in wider talks among more than 140 countries being held in Paris as well as a Group of 20 finance ministers meeting in Venice in July.

International discussions on the tax issue gained momentum after Biden backed the idea of a global minimum of at least 15% — and possibly higher — on corporate profits.

The tax proposals endorsed Saturday have two main parts. The first part lets countries tax a share of the profits earned by companies that have no physical presence but have substantial sales, for instance through selling digital advertising.

France had launched debate over the issue by imposing its own digital services tax on revenues it deemed to have been earned in France by companies such as Google, Amazon and Facebook. Other countries have followed suit. The U.S. considers those national taxes to be unfair trade measures that improperly single out American firms.

Part of the agreement Saturday is that other countries would repeal their unilateral digital taxes in favor of a global agreement.

Facebook’s vice-president for global affairs, Nick Clegg, said the deal is a big step toward increasing business certainty and raising public confidence in the global tax system but acknowledged it could cost the company.

“We want the international tax reform process to succeed and recognize this could mean Facebook paying more tax, and in different places,” Clegg said on Twitter.

The G-7 statement echoes a U.S. alternative to let countries tax part of the earnings of the largest and most profitable global companies — digital or not — if they are doing business within their borders. It supported awarding countries the right to tax 20% or more of local profits exceeding a 10% profit margin.

Yellen, asked if she had given her European counterparts assurances that large U.S. tech firms would be included, said the agreement “will include large profitable firms, and I believe those firms will qualify by almost any definition.”

The other main part of the proposal is for countries to tax their home companies’ overseas profits at a rate of at least 15%. That would deter the practice of using accounting schemes to shift profits to a few very low-tax countries because earnings untaxed overseas would face a top-up tax in the headquarters country.

Nations have been grappling for years with the question of how to deter companies from legally avoiding paying taxes by using accounting and legal schemes to assign their profits to subsidiaries in tax havens – typically small countries that entice companies with low or zero taxes, even though the firms do little actual business there.

McHugh contributed from Frankfurt, Germany.

MORE STORIES

Pixel Image