G7 reach landmark global tax deal

The G7 has agreed to back an international agreement on global tax reform. This will see multinationals pay a global minimum tax rate of at least 15% in each country they operate.

The deal between the US, the UK, France, Germany, Canada, Italy and Japan, plus the EU, could go a sizeable way to seeing that debts incurred during the COVID-19crisis will be paid off. The minimum tax rate will hit large multinationals including Amazon, Microsoft and Apple.

UK Chancellor Rishi Sunak hosted the summit in London. Sunak said the agreement would make the global tax system “fit for the global digital age”.

‘This is a truly historic agreement and I’m proud the G7 has shown collective leadership at this crucial time in our global economic recovery.’

Chancellor Rishi Sunak

Why have the rules been changed?

Presently, companies are able to manipulate their corporate structures, setting up local entities in countries who have relatively low corporate tax rates. They are potentially able to circumvent certain tax rules by declaring their profits there, even if their profits come from trading and sales made in other countries. This means they only end up paying the local rate of tax.

Multinational companies are being discouraged from moving revenue from tax and profits to low-tax countries, irrespective of where they trade. This challenge has increased with the growth of e-commerce trading such as Facebook and Amazon.

How will the Agreement work?

The principles are based on a two pillar global solution to tackle an increasingly globalised and digital economy.

Pillar One

  • The largest and most profitable multinationals will be required to pay tax in the countries where they operate not just where their headquarters are based.
  • The rules will apply to global firms with at least a 10% profit margin. They will see 20% of any profit above the 10% margin reallocated and subject to tax in the countries where they operate.

Pillar Two

  • The G7 also agreed to a minimum 15% corporation tax operated on a country by country basis. This will create a more level playing field for UK firms.
  • This will also help countries crack down on tax avoidance.

What happens next?

The next meeting will take place in July in Venice. There, the G20 finance ministers and central bank governors will meet to discuss the agreement in detail.

Once agreement is reached, the UK will stop charging the digital services tax. This tax levies a 2% charge on the gross revenues of large multinationals operating search engines, social media platforms and online marketplaces. It has thus far had limited effects on changing tax behaviour and raising revenue.

The EU commissioner for the economy, Paolo Gentiloni, said the agreement was a “big step… towards an unprecedented global agreement on tax reform”. He said that the EU would “contribute actively to making that happen” in Venice.

If you need any further advice, please get in touch with a member of our Tax team on 01903 234094.