Challenges and Prospects of the G7 Global Minimum Tax Agreement
Paragraph 1
Historic, game-changing: such has been the reaction to the recent agreement by G7 finance ministers on a global minimum effective tax rate of 15% for large multinational firms. The ministers also agreed on a new formula for apportioning a share of tax revenues from these companies among countries. But whatever global tax deal eventually emerges should reflect the interests of the whole world – and not just those of seven large economies. The developing world relies more heavily on corporate tax revenue and has been hit harder by multinationals’ tax avoidance, which results in global revenue losses of at least $240 billion each year. Many developing economies – and low-income countries in particular – are not even taking part in the negotiations on the wider OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting. Those participating have been represented by the Intergovernmental Group of Twenty-Four and the African Tax Administration Forum.
Paragraph 2
The first concern regarding the G7 deal is that the proposed minimum rate of 15% is very low, close to the rates in tax havens like Switzerland and Ireland. This reflects a preference by several G7 countries to protect their own multinationals rather than follow the lead of the US, which had called for a 21% rate. Moreover, under the current proposal, the majority of the additional tax revenues will go to multinationals’ home countries, not to the countries where these firms generate profits. Unsurprisingly, G24 members want source countries to have priority in applying the minimum tax, particularly in respect of payment of services and capital gains, in order to protect their tax base.
Paragraph 3
How much revenue the minimum tax generates will depend on the rate. A recent study estimates that a 21% rate would generate an additional €100 billion of corporate income tax revenues in 2021 for European Union countries, while a 15% levy would yield half that amount. The difference is even starker for developing countries. With a 15% tax rate, South Africa and Brazil stand to gain an additional €600 million and €900 million, respectively, compared to €2 billion and €3.4 billion at a 21% rate. As most African countries have corporate tax rates of 25-35%, a global rate of around 15% is unlikely to cause a significant reduction in profit-shifting from the region. G7 and G20 countries must demonstrate global leadership by unilaterally committing to a much higher minimum rate than whatever is finally agreed.
Paragraph 4
The second part of the G7 agreement introduces a formula to apportion multinational companies’ global profits for tax purposes. But the proposal would apply only to the largest firms with global profit margins of at least 10%. And at least 20% of their so-called “residual” profit exceeding this threshold would be subject to tax in the countries where it is generated. … The G24 has demanded a bigger reallocation of global profits, with the reallocation percentage ranging from 30% up to 50% for the most profitable firms. … In fact, it is not possible to distinguish conceptually between the “routine” and “residual” profits of a multinational, as all profits are essentially the result of the firm’s global activities. A simpler solution would be to allocate global profits among countries on a formulaic basis, according to the key factors that generate profit, namely employment, sales, and assets.
