Explainer: 'Historic' G7 deal is a step in the right direction to save $240bn a year in lost tax revenues

The deal paves the way for the global consensus necessary to reform the international tax system, OECD secretary general Mathias Cormann says

G7 finance ministers agreed a 15% minimum corporate tax, aimed at getting multinationals to pay more into government coffers. AFP 

The group of seven (G7) rich nations on Saturday agreed on a "historic" deal that will result in a minimum 15 per cent corporate tax rate. The move aimed at modernising the international tax system will enable governments to collect more taxes and impose levies on global technology giants such as Amazon, Apple, Facebook and Google.

The accord is a step in the right direction. However, key details on how it will be implemented have yet to be hammered out. More countries have to come on board and full implementation of a global minimum corporate tax regime may take a few years. Tech giants have welcomed the deal, while critics say the suggested minimum rate of taxation is low.

The National looks at what has been agreed and how significant it is for governments and global corporations.

Global corporate tax accord

The deal agreed by finance ministers from the US, Japan, France, Canada, Germany, Italy and the UK aims to discourage global multinationals companies from shifting their profits to countries with lower tax rates to avoid paying more taxes in their home countries. Critics say multinational companies have saved hundreds of billions of dollars through tax avoidance and the deal aims to tax them regardless of where their sales are generated.

What has been agreed?

G7 finance ministers agreed to put an end to shifting of jurisdictions through equitable taxation.

Under "Pillar One" of the agreement, the largest global firms with profit margins of at least 10 per cent will be taxed more equitably, with 20 per cent of any profit above a 10 per cent margin taxed in countries where they make sales, and not just where they have their headquarters, according to the UK's finance ministry.

Discussions on the two pillars – the second being a 15 per cent minimum global tax rate – have been ongoing for many years and have been a key priority for the UK’s G7 Presidency. The accord will be discussed in further detail at the G20 finance ministers and central bank governors’ meeting in July.

Why is this significant?

The accord reached by G7 finance leaders can form the basis of a worldwide deal.

Wealthy nations have struggled for years to agree on a way to raise more tax from large multinationals that often book profits in jurisdictions such as Ireland, which currently has a 12.5 per cent corporate levy and has been resisting a higher taxation rate.

The Organisation for Economic Co-operation and Development (OECD) has been working to put an end to tax avoidance strategies that exploit gaps and mismatches in tax rules to avoid paying tax. This “base erosion and profit shifting”, or BEPS, is responsible for $240 billion in lost tax revenue, the OECD says.

This is a "landmark step toward the global consensus necessary to reform the international tax system", OECD secretary general Mathias Cormann said in a statement. "There is important work left to do."

It builds momentum ahead of discussions among 139 countries negotiating the tax changes, where “we continue to seek a final agreement”, he said.

What has been the reaction?

The breakthrough agreement comes after US President Joe Biden's administration gave impetus to stalled global tax talks this year. The 15 per rate agreed, however, is well below the average in the G7.

The UK Chancellor of the Exchequer, or finance minister, said the deal is "fit for the global digital age" and ensures technology companies pay their fair share.

US Treasury Secretary Janet Yellen said the deal would “end the race-to-the-bottom in corporate taxation, and ensure fairness for the middle class and working people in the US and around the world".

French Finance Minister Bruno Le Maire described the deal as a "starting point" and said the G7 would fight "to ensure that this minimum corporate tax rate is as high as possible".

Still, critics of the deal like Oxfam's executive director Gabriela Bucher said the rate of taxation agreed is too low.

"It's absurd for the G7 to claim it is 'overhauling' a broken global tax system by setting up a global minimum corporate tax rate that is similar to the soft rates charged by tax havens like Ireland, Switzerland and Singapore," Ms Bucher said in a statement. "They are setting the bar so low that companies can just step over it."

What are businesses saying?

The global technology giants have so far welcomed the G7 tax accord, with Facebook’s vice president of global affairs Nick Clegg saying the company wants the process to “succeed and recognises this could mean Facebook paying more tax, and in different places”.

"Facebook has long called for reform of the global tax rules and we welcome the important progress made at the G7," he said on Twitter. "Today's agreement is a significant first step towards certainty for businesses and strengthening public confidence in the global tax system."

The OECD-led process “will help bring stability to the international tax system”, and the deal is a “welcome step forward in the effort to achieve this goal”, Bloomberg cited an Amazon spokesperson as saying.

Google spokesman José Castañeda said the company strongly supports the work being done to "update international tax rules".

“We hope countries continue to work together to ensure a balanced and durable agreement will be finalized soon," he said in a statement to Reuters.