G7 nears agreement on taxation of multinationals and digital tech firms

Pact would prevent companies from shifting profits to countries with low corporate tax rates

A G7 pact could be reached by the end of this week after progress on talks was made on how to create new rules around the imposition of levies on the world’s largest companies. Getty Images

The Group of Seven economies are nearing an agreement on the corporate taxation of multinationals, with hopes a global deal can be achieved later this year.

A G7 pact could be reached by the end of this week after progress on talks between officials was made on how to create new rules around the imposition of levies on the world’s largest companies.

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If an agreement is achieved, it could spur on the Organisation for Economic Co-operation and Development, which is also hosting tax reform negotiations with 135 countries directed by the wider G20.

The tax reforms could see companies no longer able to shift profits to countries with low corporation tax rates and ensure US digital tech firms pay more tax in the countries where they make sales.

The acceleration in talks came after the US agreed to accept a minimum corporation tax rate of at least 15 per cent, with France, Germany and Italy agreeing that the new proposal was a good basis for sealing an international deal by July.

"The world is closer than ever before to a global minimum tax," US National Security adviser Jake Sullivan said at the weekend.

"Great to hear the positive reception to our proposal. This is what it looks like to lead the world to end the race to the bottom."

The world is closer than ever before to a global minimum tax. Great to hear the positive reception to our proposal and thanks to @SecYellen and our partners all around the world for their work on this. This is what it looks like to lead the world to end the race to the bottom.

— Jake Sullivan (@JakeSullivan46) May 22, 2021

In April, the OECD said it was crucial that countries act together on challenges that span borders such as the taxation of multinational enterprises.

The organisation is leading talks on how to reform the system to prevent tax avoidance by big companies and digital firms and restore fiscal sustainability after the crisis.

About 135 countries aim to reach a broad agreement this summer to rework rules for taxing multinational groups and big technology companies, such as Alphabet, Facebook and Amazon.

US President Joe Biden initially called for a global minimum business tax rate of 21 per cent, a levy considered too high by Britain's Chancellor of the Exchequer Rishi Sunak despite the UK's pledge to increase corporation tax to 25 per cent in 2023 to help Britain's coronavirus-ravaged economy recover.

However, Mr Biden has now scaled back his ambitions to an effective rate of 15 per cent to not only secure a consensus with the G7 but to increase its appeal across the globe. This is still higher than in countries such as Ireland, which has a corporate tax rate of just 12.5 per cent.

Mr Sunak is pushing for a fairer way to tax the digital economy, supporting a multilateral approach to achieve a coherent international tax system that not only taxes large multinational digital companies but also ensures they pay more tax in the countries in which they operate.

If a deal can be agreed by finance ministers, the G7 could then sign it off at the Cornwall summit on June 11 to 13 and then present a plan to the 135 nations currently negotiating the OECD’s “inclusive framework”.

Meanwhile, the G20 hopes to secure a deal by the summer, although some officials say October is a more likely date for a full international agreement.