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G7 History in the Making: Global Tax Reform

Sonja Dobson, G7 Research Group
June 12, 2021

History was made on global tax reform on June 5, 2021. In the lead-up to the Cornwall Summit, G7 finance ministers met to discuss the tax challenges that arise from the digitalization of the economy. Their two-pillar agreement was years in the making and will continue to be discussed at the G20 finance ministers and central bank governors in July.

The first pillar requires the largest and most profitable multinational enterprises to pay tax in every country they operate and earn their profits in, not just the one where they say their headquarters are. However, this pillar only applies to multinationals that have a minimum 10 per cent profit margin "and would see 20 per cent of any profit above the 10 per cent margin reallocated and then subjected to tax in the countries they operate." This pillar will affect technology companies such as Amazon, Facebook and Google that often put their headquarters in countries with lower tax rates.

The second pillar is a minimum 15 per cent global corporation tax, on a country-by-country basis. This pillar is essential to combating tax evasion and levelling the playing field for corporations.

This agreement goes beyond just the G7 and G20. It is an integral stepping stone to the broader process of reforming the international tax system under the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS). According to Mathias Cormann, OECD secretary general, "this decision adds important momentum to the coming discussions among the 139 member countries and jurisdictions of the OECD/G20 Inclusive Framework on BEPS, where we continue to seek a final agreement ensuring that multinational companies pay their fair share everywhere."

The Action Plan on BEPS was agreed to in 2015 after two years of working toward an agreement. It includes "15 measures to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment." It was born out of the recognition that the digitalization and globalization of the economy were making it easier to implement tax planning strategies that exploit gaps and discrepancies in tax rules. Developing countries are especially at risk of this, as they rely heavily on corporate income tax, especially from multinationals.

Since 2015, the Inclusive Framework has monitored the implementation of each BEPS action, reporting annually to the G20, as well as undertaking peer reviews. The first peer review was on Action 5 on harmful tax practices in 2017, Action 13 on country-by-country reporting, Action 14 on mutual agreement procedures in 2018 and Action 6 on preventing tax treaty abuse in 2021.

Annually, an estimated USD240 billion is lost to tax avoidance by multinationals — that is money that could otherwise contribute to the development of developing countries. Preventing BEPS is increasingly important with the stress of COVID-19 on government budgets. This historic agreement by the G7 has already garnered support from G20 members Indonesia, South Africa and Mexico; they published an article with Germany and the United States that expressed their support for the agreement, going so far as to encourage pushing the minimum rate of 15 per cent higher. The five countries also urged other countries to reach agreement before the G20 finance ministers meeting in July. A G20 agreement on global tax reform would be another significant stepping stone to a global agreement under the Inclusive Framework for BEPS in the near future. However, G20 member China has objected to the global minimum 15 per cent tax rate before.

This agreement goes beyond just global tax reform. The agreement among G7 members and the future discussions at the G20 demonstrate a willingness to cooperate that is expected to translate into cooperation at the World Trade Organization (WTO) on the debate on waiving vaccine patents. In October 2020, South Africa and India spearheaded a proposal, alongside 57 other WTO members, to waive intellectual property rights on vaccine patents to allow for increased manufacturing outside the limited number of countries that currently can do so. Cooperation within the G7 and on global tax reform could encourage cooperation IP waivers, which would lead to more vaccines being produced and thus lead to global economic recovery.

The historic agreement on global tax reform from the G7 is therefore clearly so much more than just a G7 global tax reform agreement.

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