Last month, the leaders of the Group of Seven (G7) met in Cornwall and revealed a new agreement to introduce a global minimum corporate tax rate of at least 15%. This tax would have to be paid by all corporations, regardless of where they locate their headquarters and was created in an effort to stop large multinationals from shifting their profits into tax-havens to avoid paying corporate taxes.
Why is it necessary?
Finance leaders around the world have stated that, as of late, corporations in global commerce are trying to get the tax rate as low as possible: “We’ve had a global race to the bottom in corporate taxation and we hope to put an end to that,” Treasury Secretary Janet Yellen said in late March. Major developed economies around the world, such as Britain and the US, have wanted to raise corporate taxes and find methods to tax large tech giants at higher rates, but this is extremely difficult to do when these corporations are international but taxes are national. Essentially, no economy would be able to pass legislation to raise taxes when every other economy in the world remained at their relatively lower tax rates — not only is this controversial but it is also futile as large corporations are skilled enough to know how to move their profits into locations where the corporate tax is little to none. The global minimum rate will, ideally, ensure that all corporations around the world are taxed at the same base rate and thus create an even playing field.
Problems that may arise
This initiative does not come without its critics. Republicans have argued that this decision will inevitably reduce the competitiveness of American corporations, which was counteracted by the fact that all countries will have the same base rate. Regardless, they are still reluctant to changes in the tax code and are in favour of minimised government intervention in the economy. The Biden administration has been pushing for a hike in the corporate tax rate, as this supports the President’s plan to raise the US rate from 21% to 28% to fund his large-scale infrastructure plan. Additionally, although Biden is clearly pushing for the change, it will be an obstacle for him and his administration to get this plan through to the thinly divided Congress in which Republicans will resist changes to the tax system.
Some of the G7 delegations are in fact insistent on this tax rate being flexible, in order to ensure it can be pushed even higher in the future. Although several nations are highly supportive of this agreement, it only includes 7 nations. The G7 — Britain, Canada, France, Germany, Italy, Japan and the United States — plans to extend this proposal to the G20 as well later this year.
This tax also incorporates stricter taxation for huge multinationals, notably US tech corporations, who have avoided taxes in spite of the considerable profits they gain from operating in several locations.
All in all, this tax definitely levels out the playing field for global corporations, and could even help improve the budgets of some countries that will benefit from greater tax revenue. Although it disadvantages smaller economies that have thrived due to low taxes, such as Ireland, further planning and proposals to a greater variety of nations indicate a promising future for equitable taxation.