G7 countries reached a historic tax deal of a minimum 15% tax rate for corporations. The global minimum tax is to stimulate the global economy in the years to come.
The weekend that just ended brought a historic agreement for the financial world. The G7 countries (United States, United Kingdom, Italy, France, Germany, Japan and Canada) have reached a far-reaching agreement on global corporate tax.
The G7 tax deal involves a payment of a minimum 15% tax rate, and the profits will be allocated to the countries where sales are generated. This is in sharp contrast to how corporations were taxed until now, and a game-changer for the industry.
Higher Effective Tax Rates for Large Multinational Corporations
It is well-known that large multinational corporations choose to pay tax in various jurisdictions around the world based on corporate tax rates. That way, countries like the Netherlands, Luxembourg, Andorra, Hungary and Ireland attract more foreign corporate interest than others. For example, the statutory corporate income tax rate in Ireland was 12.5% in 2020, 10% in Andorra, and 9% in Hungary.
These are just a few examples, but they highlight exactly what was accomplished over the weekend at the G7 meeting. The corporate income tax rate was on a declining path in the developed world anyway, forced to keep pace with tax haven jurisdictions.
Saturday’s commitment by the G7 countries provides a framework for ending the race-to-the-bottom in corporate taxation. Because it levels the playing field for businesses, the global corporate minimum tax is a game-changer, fueling global economic growth.
The basic idea behind the agreement is to recognise taxation rights in countries where economic activity takes place. In other words, if a corporation sells its products and services throughout Europe, but pays its overall taxes only in Ireland, it should instead pay proportionally at each country’s tax rate, based on the level of economic activity in each country. If, for instance, the company sold 15% of its products and services in Germany, it should pay a tax rate according to German laws.
This is a basic example intended to illustrate the need for a common global corporate tax rate. The details and the actual calculations may differ, but this is the basic idea. To date, only the G7 nations are agreeing to the new system, and the road ahead is difficult until the actual implementation.
Yet, a milestone has been reached. Starting with today, corporations selling their products and services in the G7 countries must reconsider the way they pay taxes. More countries are likely to join the agreement.