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The G7 Rich Economies Agree on An Equal Tax Rate


Monday, 7 June 2021


The G7 group of rich economies, on Saturday, 5th 2021, agreed to set a global minimum corporate tax rate at 15%. It also heightened its war against tax avoidance by ensuring big companies pay more revenue tax in the countries they operate their businesses.


The meeting held in London and attended by finance ministers from the US, The UK, France, Germany, Canada, Italy, and Japan, together with the EU is expected to see billions of dollars injected into the economy and help governments settle their debts. These are the debts borrowed to cushions the citizens against the Covid-19 pandemic. However, the outcomes of the meeting are likely to press other nations to join the discussion. This is most likely to be seen in the G20 meeting next month, which includes Russia, Brazil, and China.


From the reporters, the US Treasury Secretary Janet Yellen agreed that the historic agreement on the 15% global minimum tax rate will help to end the struggles in corporate taxation and ensure middle class and working people in the US and around the world enjoy fairness in business. Moreover, the host of the summit and the UK Chancellor of the Exchequer Rishi Sunak also supported the agreement saying that the resulting global tax system would be fit for the digital age.


What Brings the Changes?


For a long time, governments have been fighting the challenges of taxing multinational entities and huge tech corporations like Amazon and Facebook. This is because such companies can open up branches in countries with low corporate tax rates and make profits there. Therefore, they are only charged with the local tax rate, even if the profits come from elsewhere, which is legally agreeable.


The deal, however, aims to change the rules in two main ways. First, the G7 group targets to make such companies pay more tax in the countries where they operate, rather than where they only declare their profits. Secondly, the group wants a global minimum tax rate to avoid countries undercutting each other. However, the deal is likely to face challenges since the right to tax is the essence of sovereign power; hence difficulties in international coordination.


Dream Comes True


Many nations, especially European finance ministers, have been dreaming to have a global minimum tax rate but thought it to be impossible. However, since the pandemic struck, the desire to fill the economic gaps and Biden taking over the US administration have created opportunities for change.


Although the European finance ministers used the term "at least 15%" to offer a chance to get a higher number in the future, others still believe that the minimum corporation tax rate was set too low. Meanwhile, the impact of the change on the large economies will depend on the outcome of the still ongoing negotiations. For instance, huge tech firms such as Facebook welcomed the move, with its vice president Nick Clegg saying the deal will see the company paying more tax in different places.


What About the Rest of The World?


The minimum corporate tax rate is agreed upon by the G7 group of rich economies. However, what will happen to the rest of the world, starting from the G20 group that includes China, Russia, and Brazil, down to the lower-class economies?


According to the German finance minister, other nations like Ireland with their low corporate tax rate need to join the trend. Although the Irish finance minister agreed that he knew the change was coming, he continues to argue for a competitive tax rate. Therefore, although the process may not be transformative, other nations outside the G7 group need to embrace this historic change. Again, while the deal is expected to be further discussed in a meeting next month by the G20 group, questions that are yet to find definitive answers include;


· How will the agreement work to balance the advanced, developing, and underdeveloped economies?

· What next once the deal is agreed upon and signed?

· How will other corporations act?


Let us wait for the answers from July's summit in Venice.