The historic deal at the minimum tax rate is a classic compromise

The seven largest economies in the world united in the G7 will meet at a summit in London this weekend Reached a historic agreement On global corporate taxation. They agreed to an international minimum profit tax rate of 15 percent, and also agreed that companies would pay higher taxes where they operate.

As a result, the United States, the United Kingdom, Japan, Italy, Germany, France and Canada continue to make it difficult for multinational corporations to transfer their income to countries with the lowest tax rates. Negotiations on this have been going on since 2013, and this weekend the agreement paves the way for a genuine global agreement at the G20 summit in Italy in July.

The global profit tax is important because many multinational companies are now looking for countries where the profit tax is as low as possible. There they establish their headquarters, and they allow all profits to flow across the country. For example, countries with higher profit taxes lose billions in revenue each year. Known countries with the lowest income tax include Ireland (12.5 percent) and Bulgaria (10 percent). By comparison, the corporate income tax rate in the United States is now 21 percent. Biden wants to raise it to 28 percent. In the Netherlands, the profit tax is 25 percent for large companies and 15 percent for small companies.

Classic compromise

The agreement now reached is a classic compromise between the two, known as the ‘pillars’. It came into effect earlier this year after President Joe Biden announced his acceptance of the minimum corporate income tax rate as the second pillar. Until then, the United States opposed the first pillar: a system of paying taxes to companies in turnover and profitability, rather than where the head office (finance) is located.

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Large technology companies, especially US companies such as Google, Amazon and Apple, will have to pay higher taxes outside the United States. After all, they make significant revenue worldwide through their services. It’s not just about technology companies, for example, big fashion brands like LVMH, which have global revenue and profitability, have to adhere to it.

On behalf of the Biden administration, Treasury Secretary Janet Yellen agreed this weekend. It has been agreed that the “world’s largest companies” with profits of more than 10 percent must deposit at least one-fifth of their profits in those profitable countries. What is meant by ‘biggest companies’ has not been released.

In return for that offer, Yellen was able to implement a global minimum rate. According to the Reuters news agency, the exact level of the minimum rate has long been debated, especially as France prefers a higher rate. The United States is expected to be one of the biggest beneficiaries of this tax rate hike, as many U.S. companies now pay lower taxes abroad, making the minimum rate less attractive that way.

Also read: France to tax tech companies like Google and Facebook

Go alone

With the G7 deal, a Go alone Europe’s suspension of taxation of digital services. In the absence of a global agreement, France, the United Kingdom and Italy in particular threatened to introduce a ‘Digitax’ format targeting US technology companies.

Paul Tong, chairman of the PvdA MEP and the European Parliament’s tax committee, said in a statement: “The G7 has sent a strong signal that by at least 15 percent the minimum tax is clear: the time for multinational corporations to make a profit is over.” On the way to the G20 summit in July Tang hopes that countries like India and China will also be able to agree to the deal. “Their access will be good, but not necessary. As the broad coalition of countries introduces the minimum rate and applies it to global operations, we are breaking the power of continuously falling tax rates,” Tang said.

Ferdinand Woolridge

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