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Experts question the G7 deal on global minimum tax

  • G7 finance ministers strike a “historic” global minimum tax agreement
  • US Treasury Secretary Janet Yellen cheers G7 deal
  • Tech giants such as Facebook, Amazon and Google will be forced to pay more tax
  • European leaders use the G7 summit to corner UK PM Boris Johnson

Over the weekend, G7 finance ministers struck a landmark agreement that will force tech giants such as Facebook, Amazon and Google to pay more tax by establishing a minimum global corporation tax.

For years, large corporations have abused the global tax system and avoided paying tax despite amassing billions in revenue.

According to the latest reports, Amazon pocketed an additional USD 60BN in wealth during 2020. Still, as its Luxembourg subsidiary booked massive operating losses, the multinational company could pay four times less tax than other local firms.

The world’s wealthiest nations met in London at the weekend and engaged in discussions on tackling tax dodging and environmental crimes.

In a “historic” move, finance ministers from G7 countries (Canada, France, Germany, Italy, Japan, the UK and the US), agreed to establish a global minimum corporate tax rate of 15% alongside other measures to crack down on tax evasion.

According to the latest reports, the G7 deal will force large corporations such as Amazon, Google and Facebook to pay taxes to countries where they have amassed significant revenue irrespective of whether they have a physical presence in that nation or not.

Although it will likely take years before the new system comes into effect, the G7 ministers made it clear that time was up for tax havens.

However, some experts have claimed that the move would increase inequality in the post-pandemic world and widen the gap between advanced and less developed countries.

Experts warn of the loopholes in the new G7 tax deal

Executive director of Oxfam International, Gabriela Bucher, said it was “absurd” for the G7 finance ministers to claim that they had overhauled the current international tax system by establishing a system akin to the approach in Switzerland and Ireland.

Ms Bucher noted that the new minimum global tax rate “has set the bar so low, tech giants will be able to step over it with ease.”

Britain’s leading progressive think tank, the Institute for Public Policy Research (IPPR), noted that the 15% rate undermines almost 50% of the potential tax revenue hike of 25% proposed by US President Joe Biden earlier this year.

The IPPR said the UK could have raised GBP 14.7BN if they had pushed for a minimal global tax rate of 25% – enough to fund the rebuild of Britain’s health care system, which is struggling to tackle a backlog of care amid staff and equipment shortages.

IPPR Centre for Economic Head George Dib explained: “With the UK corporation tax rate set to rise in 2023, the UK government should be demonstrating leadership and aiming for a global minimum rate of 21 per cent or higher with the ultimate goal of around 25 per cent.”

However, other experts have claimed that the minimum tax rate will force tax haven countries such as Ireland and Switzerland to perform tax rate hikes to stay attractive.

Jan-Egbert Sturm, a professor of economics at ETH Zurich, predicts that higher corporate tax rates in Switzerland would also trigger “some tax harmonisation within the country,” with “cantonal tax competition likely to become smaller.”

In some respects, the historic tax agreement is about far more than just tax as G7 finance ministers sought to demonstrate which nation holds the balance of power and the ability to appease domestic demands and international interests.

President Biden

G7 deal about more than just global tax reform

For US President Joe Biden, the 15% global minimum corporate tax rate is crucial. It will raise revenue to fund his USD 1.9TN to his COVID-19 recovery plan and strengthen his bargaining power in Congress.

For UK Chancellor Rishi Sunak, it allowed him to demonstrate that Brexit Britain still holds sway in international affairs.

In a video tweet, Mr Sunak insisted that the new global tax reform will create a fair system well-suited for the “global digital age.”

US Treasury Secretary Janet Yellen, who had been fighting for support on a global tax deal since Joe Biden’s inauguration, said the monumental agreement was a “significant, unprecedented commitment, that would end the race-to-the-bottom in corporate taxation.

“With appropriate coordination between the world’s richest economies, we will ensure fairness for the middle class and working people in the US and around the world.”

Ms Yellen hopes that the new global minimum corporation tax will encourage business from less-developed nations to compete on a favourable basis as the agreement will create a level playing field for companies worldwide.

Although details of the agreement are still being hammered out, several experts have praised the new deal, noting that it would encourage finance ministers from other small nations to get involved.

However, some countries, such as Switzerland, Singapore and Ireland, are not as thrilled about the news.

Minimum global tax rate spells terrible news for tax-haven nations

According to the latest news reports, Ireland – which has just recruited several large US tech firms – faces significant consequences due to the new G7 tax agreement.

Ireland, which currently offers many multinational firms a corporate tax rate of just 12.5%, could lose up to a fifth of its corporate tax revenue under the new agreement, equivalent to approximately EUR 2BN.

Even if Ireland decides to maintain its minimum 12.5% corporate tax rate, firms with operations in the country could face top-up tax requirements by their home market in addition to rates paid in Ireland, which would more than likely dampen Ireland’s appeal.

According to sources close to the G7 summit talks, Britain was also reluctant to back US President Joe Biden’s proposal for global tax reform. Sources said that initially, some ministers were concerned about the UK over-sacrificing tax authority.

Other sources said that the UK Chancellor of Exchequer Rishi Sunak wanted to negotiate better terms over the way US companies were taxed amid fears that Washington DC would reap the benefits.

Mr Sunak is haggling for a more significant share of tax revenues from US tech titans and believes to have the backing of other European delegates from France and Italy.

However, recent headlines suggest that the UK Chancellor has had little luck thus far. The US is also threatening to impose sanctions against Britain and the EU if they don’t drop their unilateral digital services taxes.

There have also been concerns raised about whether the new tax agreement will unfairly disadvantage lower-income nations and benefit-rich nations.

G7 finance ministers are still discussing technical details of the agreement. However, as there was a unanimous vote to establish a minimum corporate tax, talks will progress to a G20 summit hosted by Italy in June. Next month, other advanced nations such as China, India, and Russia will join negotiations.

Following the G20 summit, the Organisation for Economic Cooperation and Development (OECD) will hold a meeting between 135 countries to reach a global agreement before year-end.

While the agreement has to go through several other stages before it is officially established, it is hoped that the G7 outcome will create enough momentum for the rest of the world to follow suit.

The EU has also used the G7 meeting to reassert the bloc’s unity following Britain’s departure from the European Union and corner UK Prime Minister Boris Johnson.

signs of brexit breakthrough

EU expected to hand UK PM Boris Johnson an ultimatum

According to the latest reports, EU Commission President Ursula von der Leyen, French President Emmanuel Macron and German Chancellor Angela Merkel are using this week’s G7 summit to corner Mr Johnson over the Northern Ireland protocol.

Both sides are preparing for talks this week over the Northern Ireland protocol, with Britain calling for the bloc to take a pragmatic approach and the EU believed to be mulling over whether to impose trade tariffs on the UK.

According to the Brexit treaty signed by the UK and the EU, both sides have the power to take retaliatory action on the other’s exports if there has been a breach of the Withdrawal Agreement.

Earlier this week, Ireland’s foreign minister, Simon Coveney, warned Britain about the EU hardening its stance on Northern Ireland protocol after several European leaders accused UK PM Boris Johnson of “taking them for fools”.

EU ambassador to the UK, João Vale de Almeida, also refused to declare whether the EU was taking retaliatory measures as untrue, admitting that trust between both sides had broken down further.

Mr Almeida also hinted at the possibility of a UK-EU clash at this week’s G7 summit, stating: “The G7 will bring together several European leaders.

“Of the nine leaders at the meeting, five come from the EU and with Boris hosting, it’s a rare moment of intimacy.”

Brussels urged London to rebuild trust over the weekend and blamed former Chief Brexit Negotiator Lord David Frost for the hostile atmosphere around Northern Ireland Protocol talks. He argued that he had “completely failed to engage” in implementing the agreement.

João Almeida also warned that if both sides fail to make progress, “unrest in Northern Ireland would place the integrity of the single market at risk”.

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