G7 reach landmark agreement on taxing multinationals

On Saturday 5th June, the G7 countries, comprising of the United Kingdom, Canada, France, Germany, Italy, Japan and the United States, agreed to back an historic international agreement that will bring to fruition significant global tax reform at the end of 2021. This is a step towards tackling tax avoidance in international group operations. Following years of discussions, finance ministers agreed to reforms which will see multinationals pay their fair share of tax in the countries they do business.

It will require tech multinationals to pay more tax where their operations are based, and not just where they are headquartered, and will disincentivise the shifting of profits to jurisdictions with lower tax regulations. This will include raising tax revenue from some of the world’s largest tech multinationals. Backed by global leaders and tech industry giants alike, the reform has been met with enthusiasm internationally.

The first part of this landmark agreement, Pillar One, would likely apply to the largest multinational enterprises who have at least a 10% profit margin. This would see 20% of any profit above the 10% margin reallocated and then subjected to tax in the countries they operate. Notably, the criteria for recognition as one of the largest multinationals is still to be decided.

The second element of the agreement which the G7 agreed to in principle, Pillar Two, is the mandate of a global minimum corporate tax rate of 15%, operated on a country by country basis, which seeks to crack down on tax avoidance and avoid countries undercutting each other. This means that companies paying lower tax rates in a particular country could now have their taxes topped up to the minimum rate thereby disincentivising the shifting of profits to lower tax jurisdictions.

As a step towards recovery from the global pandemic, and as a preventative measure to stop countries in the race to the bottom in terms of Corporate Tax rates, it is thought that if enough of the world’s advanced economies accept the reform, then others will follow suit.

As the G7 countries are set to adopt the above agreements, they have agreed to abandon all national Digital Services Taxes (DST) and other relevant similar measures, and adopting this agreement instead, creating a standardised approach across the countries.

With more discussions planned by the G7 in the coming months, and increasing pressure for other countries to sign up and follow suit, there will be more news, debate and clarifications relating to these historical developments to follow.

If you have any queries or would like to discuss how this may impact you, please contact Ruth MacNamee or your usual AAB contact.