Thursday, May 26

G7 deal has as much to do with the balance of power as it does with global tax reform Richard Partington

TO a historic agreement has been reached. For decades, multinational corporations have abused the gaps in an international tax system that has barely changed since the agreements signed at the League of Nations in the 1920s.

After the meetings in London over the weekend, the message from the G7 group of rich nations is clear: Time is up in tax havens. In a historic move, a global minimum corporate tax rate was agreed, along with measures that force big companies and online tech giants like Facebook, Apple, and Google to pay more taxes in markets where they make money regardless of their status. physical presence.

Much remains to be resolved, in a process that will likely take several years before a single additional pound, dollar, euro or yen is delivered, but a clear direction of travel has been established.

Despite the historic milestone, the London agreement is about much more than just taxes. That will become clearer when Boris Johnson, Joe Biden and the other G7 heads of government meet at Carbis Bay in Cornwall later this week.

As with most global negotiations, the real story is about who has the balance of power and the reconciliation of domestic interests with international demands. For the G7, made up of the United States, Canada, the United Kingdom, Germany, France, Italy and Japan, it is no different.

For Rishi Sunak, host of the finance ministers meeting while the UK holds the rotating G7 presidency, it was about sending a message that post-Brexit UK still dominates the world. Sources close to the talks said the UK’s initial reluctance to back the Biden plan for a global minimum tax rate was focused on dragging Washington closer to the trade talks. Within the Conservative party there were concerns about managing by sacrificing fiscal sovereignty excessively, while the Chancellor wanted to negotiate better conditions to collect more taxes for Britain from the big American tech companies.

Despite trying to negotiate hard, it is unclear what, if anything, Sunak managed to extract beyond the headlines that suggest Britain is an uneasy ally. Washington had also made clear exactly where the balance of power lies: threatening to impose punitive tariffs on the UK and EU countries if they don’t reduce their unilateral taxes on digital services.

Britain, France, and several other countries have used these digital taxes on American tech companies as a stopgap measure until a global deal is in place, raising hundreds of millions for their national treasuries. Although Washington had demanded their immediate removal, in a possible sticking point for future progress, a specific agreement for a global minimum rate of “at least” 15% shows that such obstacles can be overcome.

For Biden, a global minimum tax is central to his economic agenda as he tries to raise more revenue to fund a $ 1.9 trillion (£ 1.3 trillion) Covid recovery plan. The president is likely to face strong opposition from Republicans in Congress, which could derail further progress. Reaching an agreement among the most powerful economies in the world helps strengthen their bargaining power.

For the EU nations, Germany, France and Italy, it was a demonstration of unity with the rest of the bloc. Ironic for a deal agreed in London six months after Brexit, this was a time to forge closer EU integration.

The fragile European project is incomplete without closer coordination on fiscal matters, as the sovereign debt crisis of a decade ago brutally revealed. Several member states apply corporate tax rates below 15%, including Ireland, Hungary and Cyprus. The major powers of the bloc see this fiscal dumping as incompatible with the ideals of the EU.

Brussels demands unanimity on tax changes, so this is a key issue for tax reform to become a reality. But by reaching a deal in London, EU finance ministers hope they can build unstoppable momentum.

Several other key details remain to be overcome. There is concern that a G7 union will benefit Western powers more, at the expense of lower-income countries in the global south. The talks will move to the G20 in Italy next month when other major nations, including Russia, China, India and Brazil, will join the negotiations, before haggling among 135 nations at the Organization for Economic Cooperation and Development, with the goal of reaching an agreement. global agreement for October.

It is for this reason that the G7 agreement is a point on the road rather than the final destination. It will be several years before an agreement is implemented. However, issuing a unanimous agreement is designed to build enough momentum for the rest of the world to line up after years of stagnant progress.

There were also broader political and economic motives. After the chaos of the Trump years, a message is being sent to China, Russia and the rest of the world that the West is back in business. G7 finance ministers fear that Beijing wants to do away with the old rules of the global economy that date back to Bretton Woods, seeking to replace them with a system that benefits China. Reaching a deal in London is designed to indicate that the Western powers are once again ready and capable of making the rules in the 21st century.

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In the wake of the Covid-19 pandemic, and after decades of neoliberal policies that line the pockets of the few rather than the many, the underlying message of the G7 deal is also to reassert the power of government over big business. Sources close to the talks said there was broad agreement that, for now at least, growing budget deficits incurred during the pandemic matter far less than a sustainable recovery, raising the possibility that the economy of large states will be a hit. lasting legacy of the pandemic.

Tears are being shed on the neoliberal right that Western powers are ending vital competition between nations by agreeing to a minimum tax rate. The Adam Smith Free Market Institute argues that Americans fought a revolution to ensure their tax rates were not set in Westminster without representation. Now they wake up in horror to find that the British have agreed, on their own turf, for Washington to set their tax rates.

This may sound like the latest kick in a moribund ideology that has dominated for four decades, but it is an argument that is likely to shake the low-tax Tories.

However, public opinion after the pandemic has shifted to the point where these concerns are irreconcilable. Long before Covid-19, no one could understand why larger companies paid less taxes due to loopholes in the international tax system, a system built on neoliberal ideals.

Before the crisis it was difficult to understand, after the crisis it is impossible to accept.

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