G7 countries agree on a Uniform minimum Corporate Tax

What is G-7 grouping?

• It is an intergovernmental organisation that was formed in 1975.
• The bloc meets annually to discuss issues of common interest like global economic governance, international security and energy policy.
• The G-7 does not have a formal constitution or a fixed headquarters. The decisions taken by leaders during annual summits are non-binding.
• G-7 is a bloc of industrialized democracies i.e. France, Germany, Italy, the United Kingdom, Japan, the United States, and Canada.
• The G7 was known as the ‘G8’ for several years after the original seven were joined by Russia in 1997.
• The Group returned to being called G7 after Russia was expelled as a member in 2014 following the latter’s annexation of the Crimea region of Ukraine
• Summits are held annually and hosted on a rotation basis by the group's members.
• The groundwork for the summit, including matters to be discussed and follow-up meetings, is done by the “sherpas”, who are generally personal representatives or members of diplomatic staff such as ambassadors.
• The leaders of important international organizations like European Union, IMF, World Bank and the United Nations are also invited.
• The Group of Seven wealthy democracies on Tuesday discussed how to form a common front towards an increasingly assertive China in the Foreign Ministers’ first in-person talks in two years.

What is in the news?

• A group of the world’s richest nations reached a landmark deal to close cross-border tax loopholes used by some of the world’s biggest companies.

  The Group of Seven said it would back a minimum global corporation tax rate of at least 15%, and put in place measures to ensure that taxes were paid in the countries where businesses operate.

  The accord, which could form the basis of a global pact next month, is aimed at ending a decades-long “race to the bottom”, in which countries have competed to attract corporate giants with ultra-low tax rates and exemptions.

  That has, in turn, cost their public coffers hundreds of billions of dollars — a shortfall they now need to recoup all the more urgently to pay for the huge cost of propping up economies ravaged by COVID-19.

Why a global minimum?

• Major economies are aiming to discourage multinationals from shifting profits — and tax revenues — to low-tax countries regardless of where their sales are made.
• Increasingly, income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to these jurisdictions, allowing companies to avoid paying higher taxes in their traditional home countries.
• With its proposal for a minimum 15% tax rate, the Biden administration hopes to reduce such tax base erosion without putting American firms at a financial disadvantage, allowing competition on innovation, infrastructure and other attributes.

Where are the talks at?

• The G7 talks feed in to a much broader, existing effort.
• The Organization for Economic Cooperation and Development has been coordinating tax negotiations among 140 countries for years on rules for taxing cross-border digital services and curbing tax base erosion, including a global corporate minimum tax.

• The OECD and G20 countries aim to reach consensus on both by mid-year, but the talks on a global corporate minimum are technically simpler and less contentious. If a broad consensus is reached, it will be extremely hard for any low-tax country to try and block an accord.
• The minimum is expected to make up the bulk of the $50 billion-$80 billion in extra tax that the OECD estimates firms will end up paying globally under deals on both fronts.

How would a global minimum tax work?

• The global minimum tax rate would apply to overseas profits. Governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could “top-up” their taxes to the minimum rate, eliminating the advantage of shifting profits.
• The OECD said last month that governments broadly agreed on the basic design of the minimum tax but not the rate. Other items still to be negotiated include whether investment funds and real estate investment trusts should be covered, when to apply the new rate and ensuring it is compatible with U.S. tax reforms aimed at deterring erosion.

What about that minimum rate?

• Talks are focusing around the U.S. proposal of a minimum global corporation tax rate of 15% - above the level in countries such as Ireland but below the lowest G7 level.
• Any final agreement could have major repercussions for low-tax countries and tax havens.
• The Irish economy has boomed with the influx of billions of dollars in investment from multinationals. Dublin, which has resisted EU attempts to harmonise its tax rules, is unlikely to accept a higher minimum rate without a fight.
• However, the battle for low-tax countries is less likely to be about scuppering the overall talks and more about building support for a minimum rate as close as possible to its 12.5% or seeking certain exemptions.