The main economies of the world reached a “historic” agreement this Saturday to introduce a global minimum tax on multinational companies.
G7 Finance Ministers, meeting in London, agreed fight tax avoidance through measures for companies to pay in the countries where they do business.
They also agreed on a global minimum corporate tax rate that will, in principle, be 15%.
The agreement reached by the United States, the United Kingdom, France, Germany, Canada, Italy and Japan will put pressure on other countries to follow suit, something that could be seen at the G20 meeting next month.
Tech giants like Amazon and Google they could be among the companies affected by the global minimum tax.
“After years of discussion, the G7 finance ministers have reached a historic agreement to reform the global tax system and bring it into line with the global digital age,” said the British finance minister, Rishi Sunak
The measure could bring billions of dollars to the coffers of governments, which have had to borrow to cope with the covid-19 crisis.
Why I know did they want to change the rules?
Governments have long faced the challenge of taxing multinational companies operating in many countries.
That challenge was on the rise with the rise of big tech corporations like Amazon and Facebook.
Until now, companies can set up branches in countries with relatively low corporate tax rates and report their profits there.
That means they only pay the local tax rate, even if the profits come primarily from sales made elsewhere. This it is legal and commonly done.
The agreement aims to prevent this from happening, mainly in two ways.
First of all, the G7 members want a global minimum tax rate to avoid a “race to the bottom” in which countries can compete with each other with low tax rates.
Second, the rules will aim to make that companies pay taxes in the countries where they sell their products or services, rather than where they report their earnings.
What’s in the agreement?
The rules for making multinationals pay taxes where they operate would apply to global companies with at least one 10% profit margin.
20% of any profit above that margin would be taxed in the countries where they operate, according to the G7 statement.
The second “pillar” of the agreement commits the States to a minimum global corporate tax rate of 15%.
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Eddie is an Australian news reporter with over 9 years in the industry and has published on Forbes and tech crunch.